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NPTEL Course
Course Title: Security Analysis and Portfolio Management
Instructor: Dr. Chandra Sekhar Mishra
Module-9
Session-17
Company Analysis – I
Outline
• Importance of Company Analysis
• Company Analysis and Stock Valuation
• Broad Methodology of Company Analysis
• Strategy Analysis
Importance of Company Analysis: In the previous two modules, we discussed about analyzing
economy and industry for investment selection. That analysis possibly helps investors in identifying the
economy and then the industries where one can invest. Having done that, one has to look for those
companies which offer better return for the investment or stocks of those companies which are likely to
outperform others. One should also be able to find the stocks that are available cheap, i.e. the market price
is more that the intrinsic value. For estimating the intrinsic value of the company one has to look at two
major aspects: the company’s business in terms of products, services, capabilities, competitiveness etc.
and corresponding business strategy & the resultant financial performance. In this module we will focus
more on the first part i.e. strategy analysis with some emphasis on new financial performance tools. The
financial performance analysis is already discussed in Module # 5.
Company Analysis vs. Stock Valuation: Having identified a good company in terms of earnings and
growth potential, one has to value the stock of the company separately. It is quite likely that the stock of a
good company is priced very high in the market, i.e. market price is higher than the intrinsic value of the
stock. The reverse can also be true.
Growth Companies vs. Growth Stocks: Growth companies are those that show more than average growth
in sales and earnings. Growth companies can also be defined as those earning rate of return more than the
expected rate of return from the investors’ point view, i.e. weighted average cost of capital. However
growth stocks are those that show higher rate of return than other stocks in the market with similar risk
characteristics. Such stocks show a superior risk adjusted rate of return. It is also true that such stocks will
not consistently show superior adjusted rate of return. Because of superior performance, there will be
more demand for the stocks and the stocks will be priced high in the market. As a result the superior
return will vanish and the stocks will show normal return.
Defensive Companies vs. Defensive Stocks: Companies with ability to show earnings while withstanding
an economic downturn are known as defensive companies. These companies are characterized with low
business and financial risk. Whereas stocks with a negative systematic risk i.e. of β (as per CAPM) are