Fundamental Analysis is the basic method for investing. It is useful for investors since it would help to make the decision. This type of analysis is so different with Technical Analysis. While Technical focus on market sentiment and speculation, Fundamental Analysis started with analyzing such firm of organization. Most of investors will use the basic rule of Fundamental Analysis before make any investment, which they will begin analyze and estimate the performance of a company and continue with analyzing the industry behavior. The biggest part of applying Fundamental analysis is looking deeply into firm's financial statement. Here, financial statement recognized as the 'heart' of such firm and gives all the information needed to indicate the true performance of that firm. Analyzing financial statement means we will looking on revenue, expenses, assets and liabilities of the firm. Firm's balance sheet, income statement and cash flow will properly examine to get all the figures. But, there is few critics on Fundamental Analysis, especially from Technical analysts and followers of efficient market hypothesis, which both feel that Fundamental analysis is traditional method and wasting time. This study will focus on using Fundamental Analysis for stocks, and relating with such actual case that occur in stocks market, exactly in Malaysia.
2.0 DEFINITION OF FUNDAMENTAL ANALYSIS
Fundamental analysis is a very basic way in investing. This analysis involves examine business's financial statement, its management, competitiveness, rival to the company and also market as an overall. This kind of analysis can be use for investment decision, for instances when dealing with foreign exchange market, futures market as well as stocks markets. In these three kinds of security market, fundamental analysis will look into various factors including economy, interest rate, production, earnings and management. By doing fundamental analysis, investors will use past and current data, but will be translated as future expectation. The benefit of using this method, analysts is able to see whether the company is making profit or not, is revenue of the company is increasing, and also, see if the company can pay all its debt and in the right position to against its rival in the business market in the future. The other advantages, analysts can estimate the risk associate with the firm, the right stocks price for the firm, and evaluating firm's top management. For the purpose of this study, fundamental analysis will be referred in the context of stocks.
PROCESS OF FUNDAMENTAL ANALYSIS
Fundamental analysis is not merely going to the basic of the firm. We are not looking only on firm's revenue and profit, but beyond that. In determining the fundamental, investor needs to include all possible factors that contribute to the economic well-being of company. All the possible factors can be divided into two categories; quantitative and qualitative. Quantitative is a numerical term, which it sources came from financial statement of company and all the features of the company including assets, debt, or profit can be precisely determined. For qualitative, its more on the quality of something, it's not a numerical figure, and intangible, such as the integrity of firm's top management, brand recognition by people or technology.
QUANTITATIVE
Under quantitative factor, financial statement is the major sources. So, we will simply look in how income statement, balance sheet and flow statement can assist investor to interpret the figure into performance of the company. So, the first type of financial statement that we will analyze is income statement. Income statement is the first thing that analysts will see in the annual report or quarter report. In this statement, the figured carried out implying the revenue, earning and earnings per share for the company. It tells how much the sale earn by the company (revenue), how much the cost spent (expenditure) and the profit achieved by the company. From here, the intrinsic value of the company can be derived. When company's sale is increasing in number, it shows a better fundamental and roses in its margin implying an increase of efficiency and profitability of the company.
Second thing of financial statement is a balance sheet. Here, it show the condition of the company financial, whether it in a good situation or not. Balance sheet show the assets of the company owns, total liabilities or debt it incur, and the difference between assets and liabilities known as equity. For assets, it consists of current assets and non-current assets. The former including cash, inventories and account receivable. It usually use and converted into cash in less than one year. For non-current assets, it's including fixed assets like property, machine and equipment. While liabilities, it has current liabilities and non-current liabilities. Former need to be pay by the firm less than one year, and the latter show the debt that firm has to repay in one year or more. So, in balance sheet, investor knows in how efficient the firm utilize it assets to maximize its revenue and profit. While the large number of liabilities and debt show that the company will require paying the debt principal plus interesting which can lead to company financial problems.
The third thing of the financial statement is cash flow statement. Basically, cash flow statement show the actual cash comes in and goes out from the firm annually and it can be quarterly. In comparison with income statement, cash flow statement excludes non-cash revenue or expenses. By understanding the cash flow of firm, investor can estimates the capability of the firm to finance its operations and future growth. As the company can generate huge amount of cash, it is a good investment while if the company able to produce profits, it's not mean the company does not get into trouble. The reason here is all about the liquidity of the firm.
QUALITATIVE
Qualitative factor can be defined as company business aspects which is difficult to be interpret. In relates to business model, management and corporate governance. First, for business model, it's associate with what exactly the firm doing or the kind of business the firm operates. This is the basic question for those investors who want to do any research to a particular company. The investors should know in how the firm generate and make money. For instance, McDonalds, well known as fast food restaurant that sells variety of food including hamburger, fries, soft drinks, and salad. So, here, we know exactly how McDonalds generate it's profits-by selling own foods. It's so simple, and then investor can take further action by analyzing its financial condition. But there are few companies that make money not from selling its own product, but instead gaining profit by franchising or licensing. Thus, this kind of companies should be avoided by investors.
Next factor of qualitative is the management. Management quality is crucial in order to lead to financial success for the company. But, evaluating the company management only benefit to professional investor like fund manager but not for individual investor. Still, there are few steps in how individual investor can evaluate the integrity of the management. Firstly by using Management Discussion and Analysis, where it can be seen at the early pages of annual report. Here, it ought to be frank relating the management looks towards the firm operations. The content is useful to look how the management opinion to take necessary action to be implemented on the firm business. Then, individual investor can look whether the firm's stocks belongs to management or not. If the management also became the shareholder, we can assume that the management will do the great job, since they also want their firm's stocks price increase in number. Subsequently, doing the evaluation by looking on management past performance. Individual investor can make a comparison on how executive perform his job in the past with current time.
The next factor contribute to qualitative is corporate governance. Corporate governance is all about a policies in how a firm secures its connection and obligation between stakeholders, directors and management. The main objective of this policies is to prevent any illegal activities and unethical behavior to be occur in the organization, and corporate governance enable the firm to do the check and balance. Inside corporate governance, it consists of certain area including the financial and information transparency, stakeholder right and director boards. Financial and information transparency is all about firm's financial situation at latest date. From all information regarding the financial of the firm, stakeholder knows what exactly the firm is doing and the progression of firms operation. Then, for stakeholder right, it means how the firms provide benefit to its entire stakeholder, which should have the same advantages as the board of directors belongs. A good organization will give some ownership of voting right to shareholder, in order for them to call meeting in expressing the thing they are concern about the board. Last area in corporate governance is the structure of board of directors. Basically, the list of the board would be mixed, which means the person in the list either local or foreigner. The aim here is, to ensure a honest evaluation of firm's management in preserve the shareholders interest. In every circumstance, the board needs to protect the interest of shareholders, and ensure the management will do the same. If fail to do so, the board have the authority to sack the management, in the behalf of the shareholder. Thus, it is important to look to the corporate governance in analyzing such organization and firm.
TOP DOWN AND BOTTOM UP APPROACH
In Fundamental analysis, the basic approach used by so many analysts is bottom up analysis and top down analysis. Either of this approach will be use in order for the analysts to make a decision which stocks should be pick and invested. Investors who use the top down analysis will make a initial step with analyzing the global economy, including both of international and domestic economy. Economy indicator such as gross Domestic Product (GDP), interest rate, inflation rate, exchange rate, price of energy and productivity of a particular country will be use. Here, we can refer back to year 2008, where economy downturn was occurred. Analysts will be looking what the consequence of global economic downturn to domestic economy. As an example, Malaysian economy was at the bottom of its performance with negative figure on its gross domestic product, percentage increase on unemployment rate, low productivity and decline in foreign direct investment. By looking at the economy condition in 2008, investors will know that, it is not the good time to make any investment in several kinds of stocks such as manufacturing and construction sector. Next, in industry analysis, investors will be focus more on total sales, price levels, foreign competition and entry or exit from the industry. Refer back to previous situation; construction and manufacturing are the sector which affected much with economy recession. As Malaysian government need to cut its expenditure, there is no new project will be done during this time, and here means construction firms will see declining on its total sales and revenue. Similar to construction sector, manufacturing sector also will experiences decrease in its sale and production since there is no new demand from inside and outside the country as most people cut their expenses on electronic stuff or clothing items. Hence, in this industry analysis, investor will starting to seek the sector that have a constant performance even global economy is affected by recession. After analyzing various data on total sale of several sectors, investor will conscious that consumer product and plantation sector remains constant in term of performance. Now, investor can decide which of the sector most suitable to make investment by either choose consumer product or plantation sector. In the last stage of top down analysis is doing business analysis. Here, investor will search the top business within a particular area or sector. So, when investors decided to choose plantation sector as industry which have good performance during recession, they will now seek the leader of this area. With a huge amount of sale and profit, investor may take Sime Darby as the company where they will make the investment. Reverse to top down approach is bottom up approach, which conversely started the analysis from business analysis.
3.0 IS FUNDAMENTAL ANALYSIS A TRADITIONAL WAY IN INVESTING STOCKS?
Previous introduction in this study discussing in how fundamental analysis been used in analyzing firms stock. This kind of analysis does the comprehensive steps in analyzing, since it does a proper evaluation on firm financial statement and also the qualitative factors associate with the firm. However, there is criticism on fundamental analysis which assuming that doing fundamental analysis is only wasting time. This criticism emerges from the technical analysts and the believer of efficient market hypothesis. Technical analysis basically use by the analyst for the security analysis base on the current price and volume. They tend to use either candlestick chart or line chart and several indicators, in order to predict the momentum of the stock price and ignore the fundamental. Technical analysts also assume that stock price implies all news and latest information on the company. While the theory of efficient market hypothesis is different between both fundamental and technical analysis. This theory state that it is impossible to generate market return in long term, since all stock price is efficiently been priced by the market. So, it is impossible to get any high return derived by fundamental or technical analysis. Here, this study not discussing about the return, but instead will focus on how fundamental analysis can help the investor to know what is exactly occur on such firm, that lead to increase or decrease in firm's stock price.
4.0 REAL ISSUES: KENMARK INDUSTRIAL BHD.
Kenmark Industrial Co. (M) Bhd, is listed company in Bursa Malaysia in Consumer Product sector. The line of operations for this company is manufacturing of computer workstations, cabinets, furniture and printing of packaging materials. Others line of business is plastic injection for furniture parts, and assembly and distribution of liquid crystal display (LCD). Kenmark exports its product to United States, Europe, Japan and Australia. The subsidiary of Kenmark Industrial including Kenmark Paper Sdn. Bhd, Kenmark (Labuan) Limited, Phoenix international Group Limited and Billion Dynamic Sdn. Bhd.
The issues emerge on this company is when on 27 May 2010, Kenmark 's stock price decrease about 58 per cent from 84 cent, and the price further drops about 68 per cent to the next morning, to be traded at 10.5 cent. The decline in Kenmark stock price as a response to the behavior made by its Independent directors, Zainab bte Abu Bakar and Yeunh Wee Tiong These two persons cancelled the audit committee meeting that should be held on 27 May and in that moment, nobody of the management can be contacted. Kenmark, during that time mentioning that its managing director James Hwang and Goh Kim Chon as the deputy general manager, are the person that usually attend the committee meeting. This organization also gives a reason that, the deputy general manager, finance and administration manager had already resigned while the managing director cannot be reach. The audit committee meeting should be held to disclose and discuss the fourth-quarter earnings of Kenmark. After the cancelled of the audit meeting, Kenmark premises located in Port Klang was closed.
After the shocked of tumble in Kenmark shares price, Security Commission require that the directors and auditors must be responsible for any problems occurred and need to comply to the code and rule of corporate governance. At this situation, Kenmark had been requested by Bursa Malaysia to investigate its financial problems, with appointing a special auditor. The other situation that brings this company to difficult condition is, when they unable to submit its audited financial statement to Bursa Malaysia, which the submission dateline on July 31. Under the rule of Bursa Malaysia, a listed company must submit its quarter report not exceed than 4 month.
ANALYSIS: FUNDAMENTAL AGAINST TECHNICAL ANALYSIS.
Above chart is referring to the movement of the share price of Kenmark. On the end of May, the price of Kenmark's stock shows huge drops. So, this study will reveal the differences between fundamental and technical analysis, in how both can determine what is exactly happen at the moment the drop prices. Here, this study will not briefly explain on technical, but simply relying on above chart to make the assumptions. First, the chart shows one year movement, from September 2009 until August 2010. In the view of technical analysis, from September 2009 until early of May 2010, the increase and the decrease of the price will be not varying too much. But, the question here is, how the technical analysts will predict the momentum of the price when reaching end of May 2010?. Because the chart of from last year exhibit constant movement, technical analysts will assume the price will be increase when let say, volume been traded is roses. So, with only relying on technical analysis, investor cannot predict what will the movement of the price for tomorrow. The answer here is, investor need to use the fundamental analysis which consist of news of the firm, to make a prediction on the movement of stock prices. In this case, on 27 May, Kenmark should held a audit committee meeting which it will unveil its financial statement, exactly March quarter report. Unfortunately, the independent director of Kenmark, Zainab Abu Bakar and Yeunh Wee Tiong had scrapped the meeting, give a reason that the managing director and deputy general manager can be reach and uncontactable. After explanation made by the director, Kenmark stocks price decline approximately about 73 cents and traded lower about 86.4 per cent in the next trading morning. Here, with using fundamental analysis, the stock price can be expected to be roses or decrease. Regarding the case of Kenmark, it show that any bad or negative action taken by anyone in such firm that breach the corporate governance code, will associate with decline in market price. So, it is so simple to know the actual reason why a price decrease or decline by using fundamental compare to technical that may use certain calculation base on volume traded to know the real story behind the price.
EVALUATION OF FINANCIAL RESULT
There is some other news despite the drops in price of Kenmark stocks. After failed to submit its first quarter financial result, the company reported experience a net loss of RM146 million. This financial result reveal by four new directors of Kenmark, in order to free from stocks suspended. This net loss faces by the company raised from lower revenue, larger cost of sale, doubtful debt and weakening assets value by its subsidiaries. The revenue for the company amounted to only RM18.7 million compared to previous year with RM38.7million. It also experiences a loss per share of 0.82 cent, much more than 0.05 cent for last year. While the cost of acquisition of plant and machinery is RM166,000. The main factor contributes to the lower revenue and increase in loss is due to the slowdown in international economy, and also weaken demand from consumer demand all around the world. Kenmark export is about 95% for the sale of its product. Thus, based on Kenmark current financial condition, it can be concluded that, every loss of profit bear by the company will be associate with the drops in share price. As we discuss in early of this study, top down approach is execute here. Assuming that we are a new investor, and desire to invest in listed companies in Bursa, we want to choose the most appropriate stocks to be invested. The stocks that included to be analyze here is Kenmark shares. First, looking at the year 2009, we know that this is a year where most of country in the world is recovering from previous recession while few other countries still experiencing downturn. So, here investor knows it is not the suitable time to make any investment. Then based on latest Kenmark financial statement which exhibit loses, investor know that Kenmark share is not the worthy stock to be invest.
5.0 EFFECTS ON UNUSED OF FUNDAMENTAL ANALYSIS
After a brief explanation on how fundamental analysis is work, we know that without this kind of analysis, such investor could not predict the movement of the price for such stock. An analysis should be done in proper manner, starting with the uses of either top down approach or bottom up approach. This is the basic rule of analysis in fundamental. Both qualitative and quantitative factor must be carefully evaluated, in order to get the most accurate information on particular firm. When investors abandoned fundamental analysis before make any investment, they will see the different view of such company. They will rely on the market sentiment and speculation in order to gain profit when investing in stocks. The used of speculation in stock market usually works only in a short term period, but in a longer time, fundamental analysis have advantage. For an example, financial ratio like Price earnings ratio will tell the investor whether current stocks price is overvalue or undervalue. With this ratio also investor can predict the firm growth and how far the price cans roses. But, when investors only depend heavily on technical analysis, all that they will get is sentiment. No brief information how far the stock's price can increase and the exact figure to evaluate the value of the stocks. As conclusion, fundamental analysis should be used as the main sources or method in investing in stocks, because it can provide all the information needed about the firm and also it value of stocks.
