Importance Of Economic Analysis

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Fundamental analysis is a process of examine the financial statement of a firm and its rivals and markets. It is concern with the overall condition of economy, and factors like interest rates, production, earnings, employment, GDP, housing, manufacturing and management. There are two approaches to carry out fundamental analysis, one is bottom up analysis and the other is top down analysis. In top-down approach the analysis begins with economic analysis by examine the various economic indicator like GDP growth rates, inflation, interest rates etc. Followed by industry and company analysis, industry analysis includes study of growth of industry, its structure, government policies, the effects of competing products etc. and company analysis is…show more content…
Economic analysis is important in order to understand condition of an economy. The level of economic activity has an impact on investment in many ways. If the economy grows rapidly, the industry can also be expected to show rapid growth and vice versa. The degree of economic growth is directly proportional to the stock price i.e. when the economic activity is high, the stock prices are also high indicating the prosperous outlook for sales and profit of the firm. Many countries of world are plagued by a rising rate of inflation. Economic analysis helps in providing an explanation of why inflation has taken place. It also suggests ways in which rate of inflation could be brought down, so that economic development could…show more content…
It aims to understand the operating, financial and capital market performance of the firm. It begins with analysis of financial statements of a firm. Financial statement includes balance sheet, income statement and cash flow statement and these information helps to determine the financial makeup of the firm. It focus on dividends paid, operating cash flow, new equity issues, and capital financing. The growth rates (of income and cash) and risk levels (to determine the discount rate) are used in various valuation models. The foremost is the discounted cash flow model, which calculates the present value of the future dividends received by the investor, along with the eventual sale price; (Gordon model) earnings of the company; or cash flows of the
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