Fundamental And Technical Analysis In Equity Valuation



Fundamental analysis is the examination of the underlying forces that affect the well being of the economy, industry groups and companies. As with most analysis, the goal is to develop a forecast of future price movement and profit from it. At the company level, fundamental analysis may involve examination of financial data, management, business concept and competition. At the industry level, there might be an examination of supply and demand forces of the products. For the national economy, fundamental analysis might focus on economic data to assess the present and future growth of the economy.

To forecast future stock prices, fundamental analysis combines economic, industry, and company analysis to derive a stock‘s fair value called intrinsic value. If fair value is not equal

to the current stock price, fundamental analysts believe that the stock is either over or under valued. As the current market price will ultimately gravitate towards fair value, the fair value should be estimated to decide whether to buy the security or not. By believing that prices do not accurately reflect all available information, fundamental analysts look to capitalize on perceived price discrepancies.
Fundamental Analysis is a method of evaluating a security by attempting to measure its intrinsic value by examining related economic, financial and other qualitative and

quantitative factors. Fundamental analysts attempt to study everything that can affect the security’s value, including macroeconomic factors (like the overall economy and industry

conditions) and individual specific factors (like the financial condition and management of companies).


·    To predict the direction of national economy because economic activity affects the corporate profit, investor attitudes and expectation and ultimately security prices.
·    To estimate the stock price changes by studying the forces operating in the overall

·    economy, as well as influences peculiar to industries and companies. To select the right time and right securities for the investment


1)    Understanding of the macro-economic environment and developments (Economic Analysis)
2)    Analyzing the prospects of the industry to which the firm belongs (Industry Analysis)
3)    Assessing the projected performance of the company (Company Analysis)

The three phase examination of fundamental analysis is also called as an EIC (Economy-Industry-Company analysis) framework or a top-down approach-

Here the financial analyst first makes forecasts for the economy, then for industries and finally for companies. The industry forecasts are based on the forecasts for the economy and in turn, the company forecasts are based on the forecasts for both the industry and the
economy. Also in this approach, industry groups are compared against other industry groups and companies against other companies. Usually, companies are compared with others in the same group.

For example, a telecom operator (Spice) would be compared to another telecom operator not to an oil company.

Thus, the fundamental analysis is a 3 phase analysis of  

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