Academic journal article Advances in Management

Case Study: A Diagnostic Study on Fundamentals of Top Indian IT Companies

Academic journal article Advances in Management

Case Study: A Diagnostic Study on Fundamentals of Top Indian IT Companies

Article excerpt

Introduction

Investors are interested in buying shares whose intrinsic worth is higher than the current market price. Fundamental analysis helps in tracing the underpriced shares worth buying to sell at higher price in near future. It refers to the examination of the intrinsic worth of a company to find out whether the current market price of shares is fair or not, whether it is overpriced or underpriced. Further if the company shows increasing trend of net profit, EPS, DPS, DYR, ROE, ROC, ROA, and BV, the company is said to have better prospects to make good profits by investing at current prices. Further, if the company has low P/E ratio and low PBV, the company shares do perform well in the stock market.

Review of Literature

For the last few decades, it has been proved that investment in shares yields better return compared to other avenues. Investing in fundamentally strong companies is safe and better returns are possible. Fundamental analysis is widely used in order to determine intrinsic value of shares in the market. The analysis of fundamentals involves inside information pertaining to companies, financial statement, business activities and both international and national i.e. micro and macroeconomic indicators. There are more than 90% investors using fundamental analysis1 to determine the real value of the share. In fact, the origin of fundamental analysis for the share price valuation can be dated back to Graham and Dodd in which the authors have claimed the importance of the fundamental factors in share price valuation.

Gordon4 also opined that the value of a company is the sum of the present value of future cash flows discounted by the risk adjusted discount rate. The study by Yu-Hon Lui and David Mole13 revealed that both fundamental and technical analyses are important to forecast the future exchange rates. Similarly, Thomas Oberlechner11 also disclosed through a study that both fundamental and technical analyses are used to predict the future exchange rates of foreign exchange. In a study, Ou and Penman7 disclosed that many use financial statement analysis such as income statement and balance sheet ratios to forecast future earnings.

Joseph D. Piotroski8 in his paradigm research examines whether a simple accounting based fundamental analysis strategy, when applied to a broad portfolio of high Book to Market firms, can shift the distribution of returns earned by an investor. The research shows that the mean returns earned by a high Book to Market investor can be increased by at least 7.5% annually through the selection of financially strong high Book to Market firms. Pascal Nguyen constructs a simple financial score designed to capture short term changes in firm operating efficiency, profitability and financial policy. The scores exhibit a strong correlation with market adjusted returns in the current fiscal period and the same continues in the following period also.

Statement of Problem

IT sector has been facing turbulent time for the last two to three years. During the slow down the companies went for downsizing drastically. The leading companies went for restructuring themselves. Infosys was not an exemption to it. Mr. Vishal Sikkha, as a new CEO of the company brought new initiative namely "zero distance" to explore ideas to improve business and profitability ultimately and hence the company started showing gradual improvement in the profitability. Similarly, other companies in the sector are too strategizing to brighten their prospects in terms of profitability. Hence the investor needs to know which company yields good profit in near future, hence he can invest in that company.

Objectives of the Study

The following are the objectives of the study:

1) To analyze the financial performance of the selected companies in terms of each selected factor.

2) To measure the consistency in the performance with respect to the factors and comparison of the companies in terms of rank (rank 1 indicates more consistency and rank 10 indicates the lowest consistency). …

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