FUNDAMENTAL ANALYSIS AND PRICE DISCOVERY
PURPOSE:
Main purpose of fundamental analysis is to determine what should be the market price of a share or securities. Therefore, buying a share at this price will not put my capital at risk. Anyway if price falls for any reason, it will regain. For example, to build a thousand square feet flat in Uttara, it costs at least 40 lakh taka (including price of land and minimum 10% profit of builder). So this is a very safe investment. If its price falls below 40 lakh, it will rise again because no one is going to sell in loss for long time.
BASIC FACTORS:
Net asset value, last revaluation and growth of NAV
Earning per share and growth of EPS
Price earning ratio and year end PE over last 3 years
Paid-up capital and share division
Director's profile
Market demand of company's product
Associated business
Assessment of similar companies
NET ASSET VALUE:
It is little bit tricky………..
Mutual fund: straight forward……..price should be very close to disclosed NAV
Banks, NBFI and general insurance: Disclosed NAV and also look when last revaluation was done. You can make a general assumption that 50% of its asset is liquid. Remaining 50% is investment in land, securities, bonds and other strategic investment. From any investment, it is expected that at least 10% return will come. So overall, from its NAV 5% return is usual in a developing economy. If its asset revaluation is done 5 years back, you can add 5 x 5%=25% with its NAV to get actual asset. It is true that devaluation also occurs to certain assets (like motor vehicle, furniture) and all company has to consider that during financial auditing (to maintain standardisation set buy financial auditing rule of Bangladesh). But revaluation cant be done without a assessor and approval from regulators.
Production companies: They usually maintain less cash and almost 90% of their asset remain invested. So, we can add 10% for each year after last evaluation year with NAV.
Example: Square pharma has not reevaluated its asset in last 10 years. Its present disclosed NAV=700. We can easily assume its actual NAV would be at least 700+ 100%=1400. In reality, it has increased much more and increase is compounding. If a revaluation is done, it is possible that square pharma NAV would close to 2000tk.
On the other hand, confidence cement has revaluated its asset this year, so its NAV would be 745 as disclosed.
Inference: a company's market price should be above its NAV and it is usual to be at 1.7 times of NAV in case of any good company.
So, square pharma's present NAV= 660tk, no revaluation done in last 10 years (at least).
So, actual NAV would be at least 1320 at least.
Market price would be 1320 x 1.7= 2224.
On the basis of NAV only square pharma's price upto 2224 tk is safe to buy.
EARNING PER SHARE and PE RATIO:
Earning per share multiplied by 15 is a very safe price for any share.
We should also consider similar types of companies status.
Growth of EPS is crucialy important.
Year end PE ratio is critical. (last 3 years)
Example, Lanka Bangla's last years EPS was 16, this year it could be 31, in 2008 it was 9.8………..almost exponential growth even after stock dividents………………..In last December its price was 288…………on the basis of EPS growth only,.in coming december its price would be(274x31/16= 530)…………….on the basis of absolute value of EPS, price could be 15 x 31=465…………………on the basis of expected year end PE ratio of 20, price could be 20 x 31= 620………………we can make an average (530+465+620)/3=538.
Therefore, Considering EPS factor only, Lanka Bangla's safe price is 538
Inference: considering present trend of EPS increase, we can hope that if we invest in LBF now, in 2011 December we may be able to make our money nearly double…………….just invest , don't worry and wait for a year.
PAID UP CAPITAL
Price of share is dependent on supply and demand theory= simple economic rule.
Two company's with similar fundamental may have different price only due to different paid up capital.
Example, EPS of GP is half of Marico, both are renowned multinational company, so GP's market price should be half of marico= 650/2=325……………in reality price is 250………….because GP has huge paid up capital.
The more important part is tradeable portion of share.
These are basics of fundamental analysis………….other factors are self explanatory
