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INVESTMENT MANAGEMENT

by Ajay Kumar
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Ajay Kumar
Ajay Kumar
Security Analysis and Portfolio Management Prof. C. S. Mishra Department of V G S O M Indian Institute of Technology, Kharagpur Module No. # 01 Lecture No. # 17 Company Analysis - I Hello, in the previous sessions we talked about economic industry and company analysis; we started those sessions on e I analysis properly known as…in the first two sessions we talked about economic analysis, then we followed off with industry analysis; the third part of this top to bottom approach is known as company analysis. (Refer Slide Time: 00:48) In this company analysis we are going to cover the following things - we will talk about why this company analysis is required, what is the importance of this; we will talk about company analysis and stock valuation - is the company analysis and stock evaluation the same or different? Then, we will talk about the broad methodology company analysis where we talk about strategy analysis and analysis of financial reports. In strategy analysis, we are going to be discussing what strategy is, what are the different types of strategies and depending on the organization we will talk about Porter’s five forces model; we will also discuss SWOT analysis known as strength, weakness,
opportunity and threat analysis for a particular company; we will also discuss another tool - popular tool - that is called P E S T or PEST analysis, where we will talk about political, economic, social and technological changes that can affect the company’s performance - that we will discuss; subsequently, we will talk about different authors who have talked about what the things should be that the people or the investor (( )) look at while choosing a company and what type of strategy this company should be looking those things we will discuss and subsequently we will follow it off with financial report analysis and what are the thing that you are going to look in financial reports. Basically, in the first part of this company analysis we will talk about strategy analysis and second part also we will talk about strategy analysis as well as financial statement analysis or financial reporting analysis - what are the things that you are going to look at the from the financial reports. (Refer Slide Time: 02:25) Moving on, we talk about the why we should go for the company analysis; till now, we have looked at the economy and we have also looked at stock market of different countries; in that, after looking at that one decides about the particular industry to - at least to invest in the stock market - allocate a particular amount of its portfolio in the stock market; then having discussed that this particular country or economy is to be invested in we look at which particular industry is providing better opportunities; that we will discuss about the industry - choosing the industry where to invest.
Having decided the industry, we then discuss about - we find out where should we put the money in a particular company, because industry can consist many companies and one has to look at the best company in that the amount of set of industry as such; then, we find out which companies we invest in and which company is a good company; and it is not necessary that it is a good company, that means, the stock also would be good; we have to look at that also; once you look at the industry we will look at which is the best companies to find out; and having found the best companies, whether the prices of those companies in terms of stock are overpriced or under priced. If they are overpriced, definitely you are not going to invest and if you have invested you will exit from that; or if it is under priced there is an opportunity that we are going to invest in that. (Refer Slide Time: 03:52) Next we have to move on….we talk about the company analysis versus stock analysis or stock company valuation versus stock valuation; in that, certain things that we must note are that good companies are not necessarily good investments; companies may offer good opportunities, but the stock in that particular company may not be offering good opportunity in a way that the stock might be already overpriced and there may not be opportunity for one to invest and get some return as such; because, the company has been good the stock may be in good demand and that is why the prices of the stock may very high.
Whatever value that we find out is called intrinsic value; whatever you find out by applying particular methodology we may end up finding that the intrinsic value is actually less than the market price as such; in that case, though the company is good the company stock may not be attractive; one has to look at the fact that a good company need not reflect that the stock of the company is also good. Another point that we talked about - as we discussed - intrinsic value of a stock has to be compared with the market value; only when the intrinsic value of the particular stock is more than the market value of the stock then it is a question of investing; otherwise, it should not be investing; as we discussed, intrinsic value of the stock should be an attractive proposition, not necessary the company itself is an attractive proposition. Another point in this particular context is that, the stock of a great company may be overpriced - so, it is not an attractive proposition; and the last thing that we will discuss in this is that stock of a growth company may not be a growth stock; when you say growth, it means good stock which has a lot of potential - the earnings and the sales and everything of the particular company is may be increasing at a rate more than the normal industrial growth; but, it not necessary that the stock of the particular company may be actually growing We will further discuss about this in the following points. (Refer Slide Time: 06:00)

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