Companies Listed On The Stock Exchange Essay Example

on how to conduct both fundamental analysis and technical analysis, along with an analysis of the banking sector and several banks within that sector.

Introduction to Equity

What exactly is Equity? In the realms of accounting and finance, equity refers to the residual claim or interest of the least senior group of investors in assets, once all liabilities have been settled. In cases where valuations of assets do not surpass liabilities, negative equity is present.

Shareholders' equity in accounting refers to the ownership claim on a company's assets. This claim is divided among individual shareholders holding common or preferred stock. When establishing a business, owners contribute funds to finance its assets, resulting in a liability known as capital, separate from the owners. From an accounting perspective, businesses consist of liabilities and assets, following the accounting equation. The positive value remaining after accounting for liabilities represents the owner's stake in the business. Understanding this definition is crucial for comprehending liquidation procedures during bankruptcy cases. In such cases, secured creditors are initially paid using proceeds from the company's assets.

Afterwards, creditors are ranked according to priority to claim the remaining proceeds. Ownership equity is the final claim on assets and is paid only after all other creditors are satisfied. If creditors cannot be fully paid, owners' equity is reduced to zero. Ownership equity is often referred to as risk capital, liable capital, and equity. Equity shares represent equal units of a company's total equity capital, divided into small denominations called shares. For instance, a company may have a total equity capital of Rs 2,00,00,000 split into 20,00,000 shares with a value of Rs 10 each.

Each unit of Rs 10 is

referred to as a Share, resulting in the company possessing a total of 20, 00,000 equity shares of Rs 10 each. Shareholders, who hold these shares, are considered members of the company and possess the ability to vote.

Equity Investment

The term equity investment commonly denotes the purchasing and retaining of stock shares on a stock market by individuals and firms, with the expectation of earning income from dividends and capital appreciation when the stock's value increases. It can also encompass acquiring ownership participation in a privately held (unlisted) company or a newly formed startup.

Investing in early-stage companies, also known as venture capital investing, is often considered riskier than investing in established businesses. Investors can purchase equity shares from the security market, either in the primary market or the secondary market. The primary market allows issuers (such as government or corporate entities) to raise funds for investment purposes or meet their obligations by selling new securities. During an Initial Public Offering (IPO), investors are offered the opportunity to acquire shares when a company goes public for the first time.

After the public issuance of shares, they can be traded in the secondary market through the stock exchange. The stock exchange helps facilitate equity share trading by allowing interested individuals to purchase company shares from existing shareholders. By investing in equity, these individuals then become shareholders themselves.

Research studies indicate that equities have the ability to appreciate in value over time, thus aiding portfolio growth and facilitating the achievement of long-term investment objectives. Equities consistently outperform other investment options in the long run, making them highly desirable and advantageous. Notably, longer-term investments in individual stocks

have shown superior returns compared to other investment alternatives.

Although not all equity investments can guarantee substantial returns, they are acknowledged as high-risk investments. For this reason, investors must conduct thorough research before making any investment decisions. While equity shares do offer higher returns compared to other choices, they also carry the highest level of risk. Hence, evaluating the "real value" or "intrinsic value" of the security prior to investing is crucial. If the intrinsic value surpasses the market value of the security, it indicates a favorable time for purchasing.

If the market price of a security is higher than its value, it is recommended for investors to sell it. To analyze equity, understanding how it is evaluated is important. The analysis of a company's equity can be conducted through:

1. Fundamental Analysis
2. Technical Analysis

Introduction to Fundamental Analysis

Fundamental analysis is a method used to determine the value of a security by focusing on underlying factors that impact a company's current and future business prospects. Fundamental analysts examine various elements that can influence the value of a security, including macroeconomic factors such as the overall economy and industry conditions, as well as specific factors related to the company's financial condition and management.

Fundamental analysis involves examining various aspects of a business, including its financial statements, health, management and competitive advantages, competitors and markets. The goal is to make financial forecasts and select stocks that will outperform the market by analyzing factors like strategy, management, products, and financial statistics. This type of analysis includes determining stock valuation, predicting future price evolution, projecting business performance, evaluating management quality, and assessing credit risk.

Through fundamental analysis, key questions are addressed regarding the

company's revenue growth and actual profitability. It also evaluates if the company is well-positioned to outperform competitors in the future or meet its debt obligations. Additionally, it assesses if the company's management engages in fraudulent accounting practices.

Fundamentals encompass both quantitative aspects (such as revenue and profit) and qualitative aspects (like market share and management quality) related to a company's economic well-being.

The text explores two main categories of fundamental factors: qualitative and quantitative. Qualitative factors pertain to the quality or nature of something, while quantitative factors can be measured or expressed numerically. The text then delves into the industry's qualitative factor, elucidating that each industry exhibits distinctions in terms of its customer base, market share, growth, competition, regulation, and business cycles. Familiarizing oneself with how the industry operates can grant investors a deeper comprehension of a company's financial well-being. Furthermore, the text furnishes examples of qualitative factors concerning customers and market share within the industry. The presence of an "economic moat" suggests that the company possesses a competitive advantage enabling it to safeguard its earnings and market share. Market share holds significance due to economies of scale whereby larger firms can effectively manage high fixed costs in capital-intensive industries. To evaluate growth potential, it proves advantageous to examine whether the overall market will witness an increase in customer numbers.

This is essential because without acquiring new customers, a company must compete for market share to achieve growth. In certain industries, there is no or minimal growth, which requires careful consideration. For instance, a manufacturing company solely focused on producing audio compact cassettes might have enjoyed immense success in the '70s, '80s, and early '90s. However, that

same company would likely face significant challenges now due to advancements in technologies like CDs and MP3s. The current market for audio compact cassettes is only a fraction of what it was during its peak popularity.

The risk of pricing power, which involves increasing prices and transferring costs to customers, is significant in competitive sectors. In industries with limited options, companies have the benefit of shifting expenses onto their customers. Wal-Mart exemplifies this trend in the retail industry by effectively determining the price for suppliers who wish to engage in business with them.

Selling to Wal-Mart can greatly diminish pricing leverage. Strict regulation in specific industries can have a significant impact on a company's investment appeal, as it may limit profits, especially in sectors where a few dominant companies control the market in a particular region. Moreover, regulations indirectly influence pricing in heavily regulated industries such as pharmaceuticals.

The Food and Drug Administration (FDA) mandates a series of clinical trials for new drugs that will be sold in order to prevent the market from being flooded with ineffective drugs that can cause fatalities. However, this testing process is time-consuming and expensive, in addition to the research and development costs incurred by drug companies. Therefore, it is crucial for investors to recognize potential regulatory expenses that may affect a company's profitability. When considering the risks and rewards associated with investments, investors must take these costs into account.

Qualitative Factor - Company Evaluation

Prior

to analyzing a company's financial statements, it is essential to evaluate various qualitative aspects of the company.

The text emphasizes the importance of considering qualitative factors when evaluating a company. These factors include the business model, competitive advantage, and management. It highlights the significance of understanding a company's operations and revenue generation through its website or annual report.

Maintaining a competitive advantage is crucial for long-term success. This can be achieved through strong brand names or dominant market positions, which help the company outperform competitors and achieve growth and profitability.

Management also plays a vital role in financial success. Evaluating leaders' competence and their ability to execute the business plan is essential. Information about management can typically be found on the corporate information section of the company's website, providing details such as biographies, employment history, educational background, and achievements of each executive.

To accurately evaluate a company's management, it is important to consider reliable indicators as the company's website may not disclose negative information. One way to gain insight into management is by examining the Management Discussion and Analysis (MD&A) section of the annual report. Although the MD&A aims to provide an honest outlook on management's performance, it can sometimes be generic. Comparing previous years' MD&As can help determine if the content is repetitive or if strategies have been successfully implemented.

Ownership and insider sales within the company are also significant factors to consider. Executives are typically compensated with cash, restricted stock, and options. When members of management hold shares in the company, it indicates a positive sign. Ideally, having the founder still in charge demonstrates a strong commitment to the company's success.

Checking whether management has been selling its stock

can provide valuable information as this data is publicly available through SEBI. It is crucial to exercise caution if management sells all of their shares while making contradictory statements in media interviews since actions speak louder than words.

Another effective method for evaluating management capability is examining past performance records of executives in previous companies. Company websites usually provide access to biographies of top executives.When individuals analyze the performance of their previous companies, they can acquire valuable insights about their skills. Specifically, larger companies with substantial market capitalization frequently arrange conference calls for management to address important matters like performance evaluations and notable progressions.

The company's web sites display excerpts of these in order to provide investors with access to them. The quantitative factor of fundamental analysis involves analyzing the financial statement of the company. Financial ratios are used to interpret financial statements and evaluate financial and management performance. There are four main types of financial ratios: performance ratios, working capital ratios, liquidity ratios, and solvency ratios. These ratios help answer various questions and concerns such as the company's return on capital investment, profit margins, debt payment efficiency, inventory turnover rate, ability to pay liabilities and debts, level of debt in relation to assets and equity, and the ability to pay interest out of profits.

The text below provides an overview of various ratios used for analyzing a company's performance:

1. Current Ratio: The current ratio is a measure of a company's ability to settle its short-term obligations and is also referred to as the working capital ratio. It illustrates the relationship between a company's current assets and current liabilities. Current assets consist
   

of cash, cash equivalents, and assets that can be easily converted into cash within a year. On the other hand, current liabilities encompass the obligations that are due within an accounting year. The formula to calculate the current ratio is Current Assets divided by Current Liabilities. Current assets comprise items such as cash in hand, cash at bank, sundry debtors, bills receivable, stock of goods, short-term investments, prepaid expenses, and accrued incomes. Current liabilities include sundry creditors, bills payable, bank overdraft, and outstanding expenses.

Objective and Significance: The current ratio is a financial metric that assesses the short-term financial health of a business by measuring its ability to pay current liabilities. The ideal current ratio is 2:1, meaning that current assets should be twice as much as current liabilities.

The short-term financial position is considered unsound if the ratio is less than 2:1, and indicates excess working capital if the ratio is more than 2:1.

Current liabilities include Sundry Creditors, Bills Payable, Bank Overdraft, Outstanding Expenses etc

term loans) includes Debentures, Mortgage Loan, Bank Loan, Public Deposits, Loan from financial institution etc. Equity (Shareholders’ Funds) = Share Capital (Equity + Preference) + Reserves and Surplus – Fictitious Assets. This ratio is used to measure proprietor's stock in the business. Proprietors prefer to have more funds from borrowings because it reduces their stake and subsequent risk in the business. Additionally, interest on loans or borrowings is a deductible expenditure while computing taxable profits. Dividends on shares are not allowed as deductions by Income Tax Authorities. The normally acceptable debt-equity ratio is 2:1.

The Fixed Assets Ratio is calculated as the Long-term Funds divided by the Net Fixed Assets. Long-term Funds consist of Share Capital (Equity + Preference), Reserves and Surplus, Long-term Loans, and minus Fictitious Assets. Net Fixed Assets refers to Fixed Assets at cost minus depreciation, and also includes trade investments. The objective and significance of this ratio is to determine the extent to which fixed assets are financed by long-term funds. It is widely accepted that fixed assets should only be financed by long-term funds. This ratio helps assess the proportion of funds invested from a long-term financial stability standpoint. Ideally, this ratio should be equal to 1.

If the ratio is less than 1, it means the firm has adopted the impudent policy of using short-term funds for acquiring fixed assets. On the other hand, a very high ratio would indicate that long-term funds are being used for short-term purposes, i. e. for financing working capital.

establishes a relationship between net sales and working capital. It measures the efficiency of utilization of working capital. The formula for calculating this ratio is Working Capital Turnover Ratio = Net Sales or Cost of Goods Sold/Net Working Capital, where Net Working Capital = Current Assets – Current Liabilities. The objective and significance of this ratio is to indicate the number of times the utilization of working capital in the process of doing business.

The investment in working capital decreases and profits increase as the ratio increases. However, an excessively high turnover indicates over-trading and can lead to financial difficulties. On the other hand, a low working capital turnover ratio suggests inefficient use of working capital.

The text emphasizes the importance of maintaining an appropriate level of stock to meet the company's needs and achieve a reasonable profit margin.

= Net Credit Sales/Average Accounts Receivables, where Average Accounts Receivables = [Opening Debtors and B/R + Closing Debtors and B/R]/2. Credit Sales is calculated as Total Sales – Cash Sales. This ratio reflects the efficiency of the company in collecting debts from its debtors, indicating how well trade debts are managed. A higher ratio signifies quicker debt collection.

The capital turnover ratio is a measure of how effectively the capital invested in a business is utilized to generate sales. It can be calculated using the formula: Capital Turnover Ratio = Net Sales/Capital Employed. Net Sales is calculated by subtracting sales return from total sales, and Capital Employed is the sum of share capital, reserves and surplus, long-term loans, and deducting fictitious assets. The objective of the capital turnover ratio is to assess the efficiency of capital utilization and determine how many times the capital is converted into sales. A higher ratio indicates better utilization of capital and can lead to increased profitability.

And Net Sales = Total Sales – Sales Return Objective and Significance: In order to determine the overall efficiency of the concern, the Net

Profit ratio is calculated. This ratio helps ascertain the operational ability of the concern. When comparing the ratio to previous years’ ratios, an increase indicates improved efficiency.

This ratio holds significant importance for shareholders, investors, and management. For shareholders, it reflects the earnings on their investment, while for management, it indicates efficiency. Additionally, this ratio influences the market price of shares, with higher ratios being preferable.

The return on equity (ROE) is a measure of the profitability of equity funds invested in

the firm. Investors prefer companies with higher ROE.

When the earnings per share is Rs. 200 and the stock is selling for Rs. 2000 per share, the P/E ratio is 10. This means that you are paying ten times the earnings. The P/E ratio is calculated to determine the potential for future capital appreciation.

Price Earning Ratio is calculated by dividing the Market Price per Equity Share by the Earning per Share.

Technical Analysis Introduction

Investors often wonder whether they should buy today or what the prices will be in the future. It would be great if we had the answers to these questions. Luckily, technical analysis can provide some insights. It involves analyzing the past prices of a security to make predictions about its future prices. This is accomplished by comparing the current price action and expectations with similar historical price patterns to forecast a realistic outcome.

In short, technical analysis is the examination of prices, primarily through charts. Technical analysts, also known as chartists, heavily rely on charts for their analysis. This form of analysis can be applied to stocks, indices, commodities, futures, and other tradable instruments influenced by supply and demand.

Price encompasses the open, high, low, or close of a security within a particular timeframe. The timeframe can range from intraday (such as tick, 5-minute, 15-minute, or hourly), daily, weekly, to monthly price data spanning hours or even years. Technical analysts, referred to as technicians, focus solely on two aspects:

1. What is the current price?
2. What is the price's historical movement? The price represents the outcome of the ongoing battle between supply and demand for a company's stock. The objective is to forecast the future price direction.

By concentrating solely on price, technical analysis takes a straightforward approach. Technicians believe it is essential to focus on the "what" rather than the "why." Why did the price increase? The answer lies in having more buyers (demand) than sellers (supply). Ultimately, the value of any asset is determined by what someone is willing to pay for it. So, what exactly is a chart? It is a depiction of prices plotted across a specific timeframe.

In statistical terms, charts are known as time series plots, such as the current chart for Minnesota Mining ; Manufacturing. On this chart, the vertical axis (y-axis) represents the price scale while the horizontal axis (x-axis) represents the time scale. Prices are plotted from left to right along the x-axis, with the most recent plot being on the furthest right. The MMM price plot covers the period from January 1, 1999 to March 13, 2000. Another question to explore is what types of charts are utilized in Technical Analysis?

1. Line Chart: This type of chart, like the

current Sun Microsystems chart, is straightforward. It is created by plotting one price point (usually the close) of a security over a specific time period. Connecting these price points over time results in a line. Some investors and traders view the closing level as more significant than the open, high, or low prices because they disregard intraday swings. Line charts are useful when open, high, and low data points are unavailable. Occasionally, only closing data is available.