Fundamental And Technical Analysis For Accountancy & Financial Management Of Business Stocks

Fundamental Analysis

Discuss about the Accountancy & Financial Management for Business Stocks.

Investing in stocks and the underlying companies without analyzing them properly will be like wheels falling off. In this report, we will be focusing on the fundamental and technical analysis.

The value of the underlying company is being estimated throughout this method. The fundamental analysis takes into consideration the fundamental value of the share in relation to the organization’s financial condition along with the management’s performance over a period of time (Moat et al. 2013). It also takes into account the economic conditions that lie within an industry. The job of a fundamental analyst is to go through the balance sheet of a company besides focusing on the profit and loss report, financial ratios and other related facts which would help him in forecasting the future of the company. The main criteria of fundamental analysis are to make use of the available actual data to assess a stock’s price. The fundamental analysis utilizes earnings, proceeds, return on equity, future growth and income margins to settle on a company’s underlying share value and the potential it has for growth in the coming days (Wafi Hassan and Mabrouk 2015). It’s in the general belief that the value of the share of a company increases with the increase in the stature of the company or the way it expands. The investor is benefited through all this in the long run.

A look at the balance sheet and other related financial data helps in comparing the price of stock with other statistics through proper ratios, with the most common being the Price-To-earnings ratio. In this ratio analysis it is calculated by dividing the number of shares with the company’s earnings per share.  This method helps in evaluating an investor’s real pay in accordance to the company’s growth. A stock is stated to be undervalued when the share price in contrast with its earnings per share is fewer than industry standard. This concludes that the stock is getting sold at a much lower price than its actual value.

A stock is said to be overvalued when an investor reimburse more for each rupee than the company earns which gives the impression that the price of the stock surpasses its basic value. This situation occurs when the investor is expecting the company to do well in the upcoming days. A high value of PE when compared to a pat PE ratio indicated the stock to be overvalued. As an investor one always has to be on his toes regarding this matter. He needs to compare the fundamental worth of the stock with its past standards. If a sudden increase in valuation is recorded, there are high chances of it being falling in order to strike out the mispricing (Petrov et al. 2015). If there is a sudden fall in the value of the share, the investor would do good to check the latest status of the company and its profit position. The PE is calculated on the basis of the earnings per share for the just ended year, and for that it is also known as trailing PE. But this has not been stated as the right method for considering a stock’s value.  Financial analysts exercise the forward PE where the anticipated earnings per share for the current year or another year are being put in use (Saha Bhuiyan and Rahman 2013).

Overvalued stock and Undervalued Stock

Example: Let’s take it for example a company named XYZ earns S$ 40 per share whereas its current share price is S$ 100. Therefore its PE ratio amounts to 2.5. Now supposing the average PE ratio for the industry to which the company belongs is 5, then the company is sad to be undervalued. If another company of the same industry is having a PE ratio of 10, then its stock will be deemed as overvalued.

Moreover an analyst anticipates the company to bring in S$ 100 per share in the next monetary year, where the PE would then be 1 which reflects that the price is undervalued even more when one judges the company’s expansion.

Technical analysis is opposite of what fundamental analysis is all about. It does not take into consideration the financial presentation of the underlying firm. The analyst’s job here is to simply study the trends that exists in the share market and affects the share price. This method takes into account that market prices are a purpose of the stock’s demand and supply, which imitates on the worth of the company (Ko et al. 2014). The method also believes in historical prices being an indicator of the future performance. This technical analysis does not depend on the financial reports of a company; rather it focuses on the market’s tendency to expect how a security will execute. Analysts look for a force to cash in that improves over time in the market or a stock. The short-term investors and traders are in the habit of using the technical analysis and very rarely by the long term players. Some very frequent technical share market analysis is day moving averages (DMAs), Relative Strength Indices (RSI) and so forth.

Moving average has been hailed as a trend following pointer. The general purpose of moving average is to identify the starting point of that trend and follow its progress path and to report if there is a turnaround. It continuously updates the average price whereas the average is taken over a definite period of time, like for 10 days or 30 minutes or 20 weeks, or whatever the trader likes to. A moving average provides a fundamental idea to the investor in which way the cost is moving.

It takes into account the current profits to current losses to come to a conclusion whether an asset is oversold or overbought (Rosillo De la Fuente and Brugos 2013). It is designed on a scale of 0-100. If it is above 70, the stock is measured to be overbought and one can sell it accordingly. Whereas if the RSI pointer is less than 30, it indicates that the stock is oversold and can be purchased.

Technical Analysis

The following shares are selected for fundamental and technical analysis:

List of Shares

ABR Holding Ltd

BBR Holding Ltd

Cambridge Industrial

DBS Group

Elec & Altech

Federal International

Gallant Venture

Hau Tech Holdings

IFS Capital Ltd

LHT Holdings

Pacific Century

Raffles Education

San tech Ltd

Tat Hong

UMS Holdings

Valvetnonics

Wheelloch

Yanziang

AIMSAMP

Baker Tech

The twenty stocks listed on the Singapore stock exchange have been selected. They are evaluated on the basis of technical analysis and after the evaluation; the ten stocks have been selected by the investor. The technical instruments used in the analysis of the performance of these selected stocks are exponential moving average (EMA), relative strength index (RSI) and Moving average converging divergence (MACD). As per the EMA tool used, for the stock ABR, the tools has indicated to buy the stock, using the MACD refer the stock to sell and RSI recommends to buy the stock (Byrne et al. 2016). The overall weight age to buy the stock is more than sell. Therefore, the investor would buy the stock. Now for the stock AIMS, after analysis the recommendation is made not to include the stock in the portfolio as two of the tools recommend the stock to sell. For the stock, Baker it is recommended by the three tools used to by the stock. Now for the stock, BBR, the two tools recommend to sell the stock and one too indicate to buy the stock. Therefore, the stock of BBR would include in the portfolio. The stock of Cambridge would be included in the portfolio as the two tools recommends to buy it. The next stock is DBS which is recommended to buy as all the three tools is telling to buy the stock. The stock of Elec and Eltek would be included in the portfolio as all the three tools is recommending to buy the stock. The stock of Hai leck and Galland Company would also be included in the portfolio as all the three tools are recommended to buy. The other stocks of the company which would form the part of the portfolio are pacific, Tat Hong and Yangziang. This is because all the three tools employed in the performance of the technical analysis are recommending buying all these three stocks. Therefore, the total of the ten stocks would comprise of the portfolio on the basis of the analysis using three technical indicators.

Now, the investor has 50000 SGD in his hand which he needs to allocate to the stocks which he has selected to include in his portfolio. The weights would be allocated to the stocks for the distribution of available funds and this weighting criteria would depend upon the average return which these stocks would yield and the risk associated with the respective stocks. For this purpose, the average return of the stocks would be found along with the standard deviation. On evaluating the return and risks of the stocks, the maximum amount of investment would be made in the stock of Pacific company followed with the Hi Leck stock and DBS stock. The investor would allocate lowest amount of funds in the stock of Baker and ABR Company. Therefore, the maximum number of shares that would form the portfolio is the shares of Hi Leck, Gallant and Pacific company. Now, after the analysis of the stocks to be included in the portfolio and the funds allocation has been done, the investor make would like to trade the stock. The investment have been cost 50000 SGD , and now if the investor decided to sell the portfolio of the stocks , then he would suffer loss and would lose the amount by the value of 2794.99. Therefore on the basis of technical analysis, it is recommended for the investor to hold on to the stocks which he has included in the portfolio (Rosillo 2013).  The details are shown below:

	30/05/2016 – Purchase	26/08/2016 – Sell	Profit/(Loss) on Stock Trading
	Share Price	Number of share	Investment Value	Share Price	Number of share	Investment Value	Share Price
ABR	$          0.70	3874	$           2,711.57	$           0.70	3874	$           2,711.57	$                            –
Baker	$          0.72	2846	$           2,049.37	$           1.40	2846	$           3,984.89	$                  1,935.52
Cambridge	$          0.53	12766	$           6,766.10	$           0.54	12766	$           6,893.76	$                     127.66
DBS	$        15.55	402	$           6,249.64	$         15.10	402	$           6,068.78	$                   (180.86)
Elec	$          0.90	6781	$           6,103.00	$           0.87	6781	$           5,899.57	$                   (203.43)
Gallant	$          0.23	16594	$           3,816.60	$           0.16	16594	$           2,655.03	$                (1,161.57)
Hai Leck	$          0.39	16644	$           6,491.12	$           0.38	16644	$           6,324.68	$                   (166.44)
Pacific	$          0.36	20297	$           7,205.45	$           0.35	20297	$           7,103.96	$                   (101.49)
Tat Hong	$          0.53	6682	$           3,507.79	$           0.53	6682	$           3,541.20	$                       33.41
Yang	$          0.93	5513	$           5,099.36	$           0.79	5513	$           4,341.35	$                   (758.01)
Total		92398	$         50,000.00		92398	$         49,524.79	$                   (475.21)

Purpose of using Moving Averages in Technical Analysis

The fundamental analyses of the stocks have made use of the tools of ratio in evaluating the stocks to form the part of the portfolio. The relevant ratios are price to earnings ratio, price to book value ratio and price to sales ratio. The ratios have been found for the respective stocks. The four of the stocks is yielding negative ratio and the rest of the stocks have positive P/E ratio. The stocks would be evaluated as undervalued or overvalued on the basis of ratios. As per P/e ratio, the stocks of company AIMS , Cambridge , Elek Eltek, Hailec, IFS, Raffles, Tat Hong, and UMS are undervalued. The rest of the stocks are overvalued. Now using the price to book value ratio, four stocks are considered to be undervalued. They are AIMS, Haileck, Raffles and stocks of UMS. Rest of the stocks such as Jardan, Pacific, Wheelock, Yangziang are all overvalued. Again, using the price to sale value, the stocks of Raffles, UMS, ABR, AIMS, Cambridge and Haileck are undervalued. The remaining fourteen stocks are considered overvalued. After evaluating the stocks using the above ratios, the stocks recommended to include in the portfolio are stocks of ABR, AIMS, Cambridge, Eleck Eltek, Hailec, IFS, San The, Tat hong , raffles and stocks of UMS.

After the evaluation of the stocks which would form the part of portfolio, the investor needs to allocate the available funds to these selected stocks of companies. For this purpose, the average value or the average return of the stocks would be found out. On the basis of average return and the risk associated with the investment in the stocks, the investor would assign the weight to each of the stocks and accordingly the funds would be invested. The investor would allocate the maximum amounts of funds in the stock of AIMS followed by the UMS. The investor would not allocate any amount in the stocks of San The. The least amount would be invested in the stocks of Raffles and Tat Hong.

After the investment is made and the portfolio using the selected stocks have been constructed, if the investor is willing to sell the stocks, the investor would exhibit an increase in the portfolio value and there would be profit by the amount 1409.22 SGD. The details are given in the following table:

	30/05/2016-Purchase	26/08/2016 – Sell	Profit/(Loss) on Stock Trading
	Share Price	Number of share	Investment Value	Share Price	Number of share	Investment Value	Share Price
ABR	$          0.70	11331	$          7,931.52	$       0.70	11331	$            7,931.52	$                       –
AIMS	$          1.37	14409	$        19,668.30	$       1.40	14409	$          20,172.61	$               504.32
Cambridge	$          0.53	5630	$          2,983.96	$       0.54	5630	$            3,040.26	$                 56.30
Elec & Eltek	$          0.90	2135	$          1,921.40	$       0.87	2135	$            1,857.36	$                -64.05
Hai Leck	$          0.39	8149	$          3,177.94	$       0.38	8149	$            3,096.45	$                -81.49
IFS	$          0.22	7906	$          1,739.41	$       0.21	7906	$            1,620.81	$              -118.60
Raffles	$          0.22	1200	$             258.04	$       0.38	1200	$               456.08	$               198.03
San The	$          0.23	0	$                     –	$       0.21	0	$                      –	$                       –
Tat Hong	$          0.53	1588	$             833.83	$       0.53	1588	$               841.77	$                   7.94
UMS	$          0.57	20150	$        11,485.60	$       0.62	20150	$          12,392.36	$               906.76
Total		72498	$        50,000.00		72498	$          51,409.22	$            1,409.22

Conclusion:-

From the above discussion it is concluded that constructing the portfolio based on the fundamental analysis would yield positive return. On the other hand, technical analysis would yield negative return. However, the technical analysis is mainly recommended for the short term trading and the fundamental analysis is suitable when seeking long term investment (Larsson, B 2014).

Reference:

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Cervelló-Royo, R., Guijarro, F. and Michniuk, K., 2015. Stock market trading rule based on pattern recognition and technical analysis: Forecasting the DJIA index with intraday data. Expert systems with Applications, 42(14), pp.5963-5975.

Ko, K.C., Lin, S.J., Su, H.J. and Chang, H.H., 2014. Value investing and technical analysis in Taiwan stock market. Pacific-Basin Finance Journal,26

Larsson, B., 2014. Investment strategies and their performance-Do Hedge and Quant funds, as well as funds using Fundamental analysis, have different risk adjusted returns-and can any of them beat the market?.

Moat, H.S., Curme, C., Avakian, A., Kenett, D.Y., Stanley, H.E. and Preis, T., 2013. Quantifying Wikipedia usage patterns before stock market moves.Scientific reports, 3.

Petrov, S., Barkhatova, D., Kashina, O. and Murashkin, R., 2015. Revealing of investors’ expectations in the stock exchange using fundamental analysis models. 

Piotroski, J.D. and So, E.C., 2012. Identifying expectation errors in value/glamour strategies: A fundamental analysis approach. Review of Financial Studies, p.hhs061.

Rosillo, R., De la Fuente, D. and Brugos, J.A.L., 2013. Technical analysis and the Spanish stock exchange: testing the RSI, MACD, momentum and stochastic rules using Spanish market companies. Applied Economics,45(12), pp.1

Saha, A.K., Bhuiyan, M. and Rahman, A., 2013. Predictability of stock price fluctuation based on price earnings ratio

Wafi, A.S., Hassan, H. and Mabrouk, A., 2015. Fundamental Analysis Vs Technical Analysis in The Egyptian Stock Exchange–Empirical Study.International Journal of Business and Management Study–IJBMS, 2(2)