Fundamental Analysis

The EIC Framework (Expanded)

The EIC framework provides a structured and comprehensive approach to fundamental analysis. It breaks down the analysis into three key areas: Economy, Industry, and Company. Here's a more elaborate explanation:

• Top-Down Approach: Fundamental analysis emphasizes a "top-down" methodology. This means starting with a broad perspective (the economy), narrowing down to a more focused view (the industry), and finally, zooming in on the specific company. The book mentions the 'EIC' and 'CIE' framework, but the preference is for EIC.

1. Economic Analysis:

• Explanation: This involves studying macroeconomic factors that can influence the performance of securities markets and individual investments. The goal is to understand the overall economic climate and its potential impact on corporate profitability and investor sentiment.
• Key Indicators (as provided):

  • GDP Growth: A measure of the overall economic output of a country. Higher growth typically leads to higher corporate profits and stock prices.

  • Inflation: The rate at which prices are rising. High inflation can erode corporate profits and reduce consumer spending.

  • Interest Rates: The cost of borrowing money. Higher interest rates can slow economic growth and reduce corporate profitability.

  • Monetary and Fiscal Policies: Actions taken by the central bank and government to influence the economy.

    • Monetary Policy: Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.

    • Fiscal Policy: Government policy that attempts to manage the economy by controlling taxing and spending.

  • Exchange Rates: The value of one currency relative to another. Exchange rate fluctuations can impact the profitability of multinational corporations and affect international trade.

  • Global Economic Trends: Conditions and trends in the global economy can significantly impact domestic markets. You would always factor these in.

• Significance: Provides a broad overview of the investment climate and helps investors understand the potential opportunities and risks in the market. For example, in a period of low growth it is expected that the stock prices for high-capital assets may decline.

2. Industry Analysis:

• Explanation: This involves evaluating the specific industry in which a company operates to understand its growth potential, competitive landscape, and risks.

• Factors (as provided):

  • Industry Life Cycle: Understanding where the industry is in its life cycle (growth, maturity, decline) is crucial for assessing its future prospects.
  • Demand-Supply Conditions: Analyzing the balance between demand and supply in the industry to determine pricing power and profitability.
  • Government Regulations: Understanding how government regulations impact the industry's operations and profitability.
  • Technological Advancements: Assessing the potential for new technologies to disrupt the industry or create new opportunities.
  • Competitive Landscape: Understanding the competitiveness, power struggles, and degree of commodification in the industry.
  • Labour Relations: Understanding the labour conditions that impact growth.

• Significance: Provides a more focused view of the company's operating environment and helps investors assess its competitive advantages and risks. It also provides information on market opportunities.

3. Company Analysis:

• Explanation: This involves examining the financial health and performance of a specific company to determine its intrinsic value.
• Key Aspects (as provided):

  • Quantitative Factors: Analyzing financial statements to assess profitability, liquidity, leverage, and efficiency.

    • Financial Ratios: Using key ratios to identify trends and compare the company's performance to its peers.
    • Earnings Growth: Evaluating the company's track record and prospects for future earnings growth.
    • Revenue Trends: Analyzing revenue growth to assess the demand for the company's products or services.
    • Growth of Assets and Liabilities.

  • Qualitative Factors: Assessing non-numerical factors that can impact the company's performance.

    • Management Quality: Evaluating the experience, integrity, and track record of the management team.
    • Brand Strength: Assessing the company's brand recognition and customer loyalty.
    • Competitive Advantage: Identifying unique strengths that allow the company to outperform its rivals.

  • Corporate Governance: Assessing the company's ethical standards, transparency, and accountability.

• Significance: Provides a detailed understanding of the company's financial health, competitive position, and future prospects, enabling investors to determine its intrinsic value.
• Provides an advantage of comparison.

In essence, the EIC framework is a step-by-step process to break complex economic concepts into easily digestible segments. It is a very common framework in analyzing all potential assets in the modern investing ecosystem.