Business Analysis
Investing Series I Education Hub
Once you have shortlisted stocks or companies, an investor might analyze the resources and capabilities within each company to identify those companies that are capable of creating and maintaining a competitive advantage. The analysis could focus on selecting companies with a sensible business plan, solid management, and sound financials.
Learning Tip
Finding a great stock for investment is more about finding a great business in investing. There are several key factors to study to find the right stock.
Understanding
Factors of Analysis
Business plan: The Business plan, model or concept forms the bedrock upon which all else is built. If the plan, model or concepts stink, there is little hope for the business. For a new business, the questions may be these: Does its business make sense? Is it feasible? Is there a market? Can a profit be made? For an established business, the questions may be: Is the company’s direction clearly defined? Is the company a leader in the market? Can the company maintain leadership? these are most important factors to check the business plan.
Company’s Management: In order to execute a business plan, a company requires top-quality management. Investors might look at management to assess their capabilities, strengths and weaknesses.
Even the best-laid plans in the most dynamic industries can go to waste with bad management (AMD in semiconductors). Alternatively, even in a mature industry, strong management can make for increased success (Alcoa in aluminum).
Financial Analysis: The final step to this analysis process would be to take apart the financial statements and come up with a means of valuation. Below is a list of potential inputs into a financial analysis. Like, Business Cycle, Business Idea, Business Model, Business Plan, Capital Expenses, Cash Flow, Cash on hand, Current Ratio and so on. There are enormous factors to assess. A complete financial model can be built to forecast future revenues, expenses and profits or an investor can rely on the forecast of other analysts and apply various multiples to arrive at a valuation. Some of the more popular ratios are found by dividing the stock price by a key value driver. Example,
| Ratio | Company Type |
|---|---|
| Price/Book Value | Oil |
| Price/Earnings | Retail |
| Price/Earnings/Growth | Networking |
| Price/Sales | B2B |
| Price/Subscribers | ISP or Cable Company |
This methodology assumes that a company will sell at a specific multiple of its earnings, revenues or growth. An investor may rank companies based on these valuation ratios. Those at the high end may be considered overvalued, while those at the low end may constitute relatively good value.
Conclusion
Important Points
After all is said and done, an investor will be left with a handful of companies that stand out from the pack. Over the course of the analysis process, an understanding will develop of which companies stand out as potential leaders and innovators. In addition, other companies would be considered laggards and unpredictable. The final step of the fundamental analysis process is to synthesize all data, analysis, and understanding into actual picks.