1. FUNDAMENTAL ANALYSIS OF A
STOCK
Presented by
Mr Fahim Akhtar, Secretary General
Association for investor's awareness
www.aia.org.pk

2. SCHEME / SEQUENCE
 What fundamental is
 Significance of fundamentals
 How to analyze a stock
 Forming a view / strategy
www.aia.org.pk

3. FUNDAMENTAL
Fundamental analysis is performed on historical
and present data, but with the goal of making
financial forecast . There are several possible
objectives:
To conduct a company stock valuations and predict
its probable price evolution,
To make a projection on its business performance,
To evaluate its management and make internal
business decisions
www.aia.org.pk

4. SIGNIFICANCE OF FUNDAMENTALS
 Give true picture
 Emotions can be overcome
 Growth can be measured
 Investment strategy can be formed
 Brings professional approach in trade
www.aia.org.pk

5. HOW TO ANALYZE A STOCK
www.aia.org.pk

6. DATA REQUIRED
 Financial reports both current and historical
 All current information about company
 Plans of company currently in implementation
 Impact of rules or taxation
www.aia.org.pk

7. WHERE DATA IS AVAILABLE
 Company websites
 KSE website
 Few forums ( discussion forums)
 aia websites
www.aia.org.pk

8. WHAT IS IMPORTANT TO SEE
 Balance sheet
 Income statement
 Cash Flow statement
www.aia.org.pk

9. BALANCE SHEET
A summary of a firm’s financial position on
a given date that shows total assets = total
liabilities + owners’ equity.
www.aia.org.pk

10. INCOME STATEMENT
A summary of a firm’s revenues and
expenses over a specified period, ending with net
income or loss for the period
www.aia.org.pk

11. CASH FLOW
Provides information what actually happening
in business beyond that either contained in balance
sheet or income statement
www.aia.org.pk

12. BALANCE SHEET
www.aia.org.pk

13. ALI FERT – ASSET SIDE
ALI Fert Balance Sheet (thousands) Dec. 31, 20011a
Cash $ 90 a. How the firm stands on a
Acct. Rec.c 394 specific date.
Inventories 696 b. What ALF owned.
Prepaid Exp d 5 c. Amounts owed by customers.
Accum Tax Prepay 10 d. Future expense items already
paid.
e. Cash/likely convertible to cash
Current Assets $1,195
e
within 1 year.
Fixed Assets (@Cost) 1030
f
f. Original amount paid.
Less: Acc. Depr. g (329) g. Acc. deductions for wear and
Net Fix. Assets $ 701 tear.
Investment, LT 50
Other Assets, LT 223
Total Assets b
$2,169
www.aia.org.pk

14. ALI FERT – LIABILITIES SIDE
ALI fert Balance Sheet (thousands) Dec. 31, 2011
Notes Payable $ 290 a. Note, Assets = Liabilities +
Acct. Payablec 94 Equity.
b. What ALF owed and
Accrued Taxes d 16 ownership position.
Other Accrued Liab. d
100 c. Owed to suppliers for goods
Current Liab. $
e
and services.
500 Long-Term Debt f d. Unpaid wages, salaries, etc.
530 Shareholders’ Equity e. Debts payable < 1 year.
Com. Stock ($1 par) g f. Debts payable > 1 year.
g. Original investment.
200 Add Pd in Capital g
h. Earnings reinvested.
729 Retained
Earnings h 210 Total Equity
$1,139
a,b

15. INCOME STAEMENT
Statement of Earnings (in thousands) for Year Ending
December 31, 2011a
Net Sales $ 2,211 a. Measures profitability over
Cost of Goods Sold b 1,599 a time period.
Gross Profit $ 612 b. Received, or receivable,
SG&A Expenses c 402 from customers.
EBITd $ 210 c. Sales comm., adv.,
Interest Expensee 59 officers’ salaries, etc.
EBT f $ 151 d. Operating income.
Income Taxes 60 e. Cost of borrowed funds.
EATg $ 91 f. Taxable income.
Cash Dividends 38 g. Amount earned for
Increase in RE $ 53 shareholders.

16. LIQUIDITY RATIO
Balance Sheet Ratios Current
Current Assets
Liquidity Ratios Current Liabilities
Shows a firm’s ability to For ALI Fert
cover its current December 31, 2007
liabilities with its current $1,195
assets. = 2.39
$500
www.aia.org.pk

17. LIQUIDITY RATIO COMPARISION
Current Ratio
Year ALF Industry
2011 2.39 2.15
2010 2.26 2.09
2009 1.91 2.01
Ratio is stronger than the industry average.
www.aia.org.pk

18. LIQUIDITY RATIO
Balance Sheet Ratios Acid-Test (Quick)
Current Assets - Inv
Liquidity Ratios Current Liabilities
For ALF
Shows a firm’s ability to
December 31, 2007
meet current liabilities
with its most liquid $1,195 - $696
= 1.00
assets. $500
www.aia.org.pk

19. LIQUIDITY RATIO COMPARISION
Acid-Test Ratio
Year ALF Industry
2007 1.00 1.25
2006 1.04 1.23
2005 1.11 1.25
Ratio is weaker than the industry average.
www.aia.org.pk

20. SUMMARY
Ratio ALF Industry
Current 2.39 2.15
Acid-Test 1.00 1.25
• Strong current ratio and weak acid-test ratio
indicates a potential problem in the inventories
account.
• Note that this industry has a relatively high level
of inventories.
www.aia.org.pk

21. WHY CASH FLOW IS IMPORTANT
• Cash generated by company is sufficient for expansion
strategy
• Stock holders wants to know if company can pay
dividends
• Suppliers knows they will get their credit supplies paid
• Investors wants to evaluate future growth potentials
www.aia.org.pk

22. FORMAT OF CASH FLOW
• Cash flow from operating activities
• Cash flow from investing activities
• Cash flow from financing activities
www.aia.org.pk

23. FORMING A STRATEGY
• Find consistent growth
• Watch gain in income
• Cash flow is to be seen critically
• If all these factors do not support try to find and
ascertain reason
•
www.aia.org.pk

24. QUESTIONS
www.aia.org.pk