🔹 Meaning:
Financial analysis is the process of evaluating a company’s financial statements — mainly the
income statement, balance sheet, and cash flow statement — to assess its profitability,
financial health, performance, and future prospects.
In the context of Security Analysis and Portfolio Management (SAPM), financial analysis
helps investors determine the true value of a security (like shares or bonds) and decide
whether it is worth investing in.
🔹 Objectives of Financial Analysis:
1. To assess profitability – How efficiently a company earns profits.
2. To evaluate financial stability – Whether the company can meet its short-term and long-
term obligations.
3. To estimate intrinsic value – Helps in identifying undervalued or overvalued securities.
4. To support investment decisions – Guides portfolio managers in selecting the right
securities.
5. To forecast future performance – Predicts the company’s growth and risk potential.
🔹 Types of Financial Analysis:
1. Horizontal Analysis:
o Compares financial data across different periods.
o Example: Comparing revenue growth over 3 years.
2. Vertical Analysis:
o Shows each item as a percentage of a base figure (like total sales or total assets).
o Helps identify cost structures or asset composition.
3. Ratio Analysis:
o Uses financial ratios to measure performance and position.
o Categories:
Liquidity Ratios: Current Ratio, Quick Ratio
Profitability Ratios: Net Profit Margin, Return on Equity (ROE)
Leverage Ratios: Debt-to-Equity Ratio
Efficiency Ratios: Inventory Turnover, Asset Turnover
4. Cash Flow Analysis:
o Examines inflows and outflows of cash to evaluate liquidity and solvency.
5. Trend Analysis:
o Observes long-term patterns to forecast future performance.
🔹 Importance in Security & Portfolio Management:
Helps investors identify strong and weak companies.
Aids in selecting undervalued stocks for maximum return.
Supports portfolio diversification by understanding different firms’ risk profiles.
Provides a basis for estimating expected returns and risk levels.
Essential for fundamental analysis — which determines the fair price of a security.
🔹 Example:
Suppose an investor is analyzing Tata Motors Ltd.
By examining its financial statements, they find that net profits are rising, debt is
manageable, and return on equity is improving.
This financial analysis may lead to the conclusion that Tata Motors’ stock is a good
investment opportunity for inclusion in the portfolio.
✅ In short:
Financial Analysis is a key step in evaluating a company’s financial performance and intrinsic
value, which helps investors make informed decisions in security selection and portfolio
management
Definition:
Technical analysis is the study of historical market data, primarily price and volume, to forecast
the future price movements of securities.
🔹 Key Assumptions of Technical Analysis:
1. Market action discounts everything:
All information (economic, political, psychological) is already reflected in stock prices.
2. Prices move in trends:
Prices tend to move in identifiable trends — upward, downward, or sideways — that
persist over time.
3. History tends to repeat itself:
Price patterns and investor behavior repeat over time due to market psychology.
🔹 Main Tools of Technical Analysis:
1. Charts and Graphs – Line charts, bar charts, candlestick charts show price movements.
2. Trend Lines – Identify the direction of market movement (uptrend, downtrend).
3. Support and Resistance Levels –
o Support: Price level where demand is strong enough to stop prices from falling.
o Resistance: Price level where selling pressure prevents prices from rising.
4. Moving Averages – Help smooth out price data to identify the direction of a trend.
5. Indicators and Oscillators – Such as RSI (Relative Strength Index), MACD (Moving
Average Convergence Divergence), Bollinger Bands, etc.
6. Volume Analysis – Confirms the strength of a price trend; higher volume means stronger
conviction.
🔹 Advantages:
Helps in timing buy and sell decisions.
Can be applied to any security or market.
Focuses on actual market behavior, not theoretical values.
🔹 Limitations:
Ignores fundamental factors like earnings or management quality.
May give false signals during volatile or manipulated markets.
Relies on historical data — “past performance may not guarantee future results.”
🔹 Example:
If a stock has been moving upward and crosses its 50-day moving average, a technical analyst
might see this as a buy signal, expecting the trend to continue.
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