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Fundamental Analysis
1
Module 7 - Learning Objectives
• Define fundamental analysis.
• Differentiate between fundamental, technical and speculative analysis.
• Define income statement and its major components.
• Define balance sheet and its major components.
• Define cash flow statement and its major components.
• Analyze and evaluate key measures in a company’s income statement,
balance sheet, and cash flow statement.
• Evaluate a company’s products and market position.
• Evaluate a company’s management.
• Explain earnings estimates and how they can be used to evaluate a
company.
• Download financial statements from financial websites and evaluate an
investment.
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What Is Fundamental Analysis?
Fundamental analysis:
Looking for hidden value in
a company.
Technical analysis:
Discerning patterns in price
charts.
Speculative investing:
Playing the odds.
Some finance types believe
that none of these work. The
market is “efficient” and
stocks are priced at what
they’re worth.
3
How Do You Do Fundamental Analysis?
4
What are you looking for?
6
Product and Market
7
Product and Market?
• AT&T
• EMC
• Amgen
• Time Warner
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Management
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Financial Statements
• Accounting is the language of business
• Companies are required to report their financials
according the accounting standards
• Publicly-listed companies need to file their financials
with the SEC
• The main financial statements:
– Income Statement
– Balance Sheet
– Cash Flow Statement
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Income Statement
Activity for the year - revenues and expenses
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What’s your income statement?
Average Average You
Household Household
Under 25 Years 35-44 Years
1998 1998
Median Income (Revenues) $23,564 $48,451
Total Spending (Expenses) $19,436 $42,154
Food at home 1,518 3,314
Food Away from Home 1,557 2,439
Alcoholic beverages 311 328
Housing 6,151 14,181
Clothing 1,134 2,193
Transportation 4,149 7,873
Health care 445 1,688
Tobacco 186 344
Pensions and Insurance 1,040 4,415
Entertainment 974 2,215
Reading 64 162
Education 1,139 597
Donations 206 997
Other 562 1,407
Income Before Taxes $4,128 $6,297
Taxes 866 4,132
Net Income After Taxes $3,262 $2,165
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Balance Sheet
Snapshot of financial situation
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What’s your net worth?
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How does it work for companies?
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Evaluating Income Statements
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17
Calculate growth in debt and equity for
American Home Products now part of
Pfizer. What do your findings show?
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Calculate Pfizer’s growth in operating cash
flow. What does it tell you about the
company?
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Earnings Projections
• Forecast or prediction of what
the company will do in the next
two years
• Detailed analysis of the company
• Create a financial model
(income statement, balance sheet
and cash flow statement) for the
company
• Basis of where analysts think
stock price will be in the next
two years.
21
Pfizer’s Earnings Estimates
Reported Actuals
Quarter Year
Year Ago Actual EPS 0.25 1.02
Current vs. Year Ago 24% 27%