Company Analysis
Company analysis is a rigorous analysis of key financial documents, metrics,
strategies, market dynamics and external insights, investors can develop a holistic
understanding of a company’s operations, value drivers and potential risks.
Company analysis allows investors to make well-informed judgments about a
company’s viability, financial health and ability to generate profitability and returns
over the long run.
Effective company analysis involves studying a variety of qualitative and quantitative
factors. Investors analyze key documents such as annual reports, balance sheets,
income statements and cash flow statements to discern historical performance,
financial position and operational cash generation. In addition, they examine critical
financial ratios, growth rates, margins and valuation multiples to assess
management efficiency, profitability, leverage and overall value. Strategic overviews
of the business model, competitive landscape, management team and future plans
provide invaluable context about positioning and strategies. And, they also assess
important industry or market dynamics that present opportunities or threats.
By taking a multi-dimensional research-based approach across all these operational,
financial and external aspects, investors arm themselves with comprehensive
insights into a company’s current realities and future prospects. This supports
prudent investment decisions that can potentially deliver optimal risk-adjusted
returns. Thorough company analysis forms the foundation for making well-informed
choices for portfolio construction and stock market participation.
What is company analysis?
Company analysis refers to the detailed study of a company’s operations,
financials, management, products and services, competitors, market position,
and industry trends. Company analysis is an essential part of fundamental analysis
that investors conduct before deciding to invest in a company’s stock. The goal of
company analysis is to gain a comprehensive understanding of the business so
investors determine if the stock is undervalued or overvalued compared to its true
worth.
What is the importance of company analysis?
The importance of company analysis is that it provides the tools and data for
investors to make smart stock picks. Scrutinizing a company is due diligence that
reduces some of the hazards in stock investing. The more you know before you buy
a stock, the better your odds of picking a security with the best potential returns.
Rigorous company analysis provides investors with intimate knowledge of the
business. By familiarizing themselves with how the company operates; its financials,
products, markets, competitors and management, investors understand more about
the particular drivers of the company’s profits and what it stands to lose.
This knowledge enables them to make informed projections of future performance,
and to consider whether the current stock price reflects too much, too little, or just
the right amount of risk and future profit. A company’s income statement, balance
sheet, and cash flow statement provide impartial data about the firm’s past
performance. Key financial ratios over time reveal the company’s operating trends.
Any red flags are more readily apparent, and the stock can be valued using financial
techniques such as discounted cash flow modelling. This yields a fundamental, or
equilibrium, value against which the market price can be compared.
How to do a company analysis?
Company analysis involves a multi-step process examining all aspects of the
business to provide data-driven strategic recommendations. It is crucial for
understanding a firm’s current position and growth opportunities. The steps to be
followed are given below.
1. Research the company’s industry and competitors: Analyse the industry
landscape, including size, growth, regulations, and technology trends. Identify key
competitors and perform competitive benchmarking on market share, strengths,
weaknesses, and advantages versus the company. This provides insight into the
external environment and competitive positioning.
2. Examine the company’s business model and operations: Evaluate the
company’s target markets, products/services, distribution, supply chain,
partnerships, manufacturing processes, assets, and resource utilisation. Assess
operational efficiency and productivity. The goal is to understand the company’s core
businesses, operating model, and how efficiently it delivers value.
3.Review financial statements and performance: Analyze past financial
statements (balance sheet, income statement, cash flow statement) over 3-5 years.
Calculate and benchmark key financial ratios against competitors. Identify
positive/negative trends in revenues, profits, debt, and other metrics.
4. Assess management and leadership: Research the background of
executives/board and their strategy. Evaluate leadership qualifications, track record,
vision, and governance policies. This provides insight into management’s capabilities
and alignment with shareholders.
5. Conduct a SWOT analysis: Based on preceding research, perform a SWOT
highlighting key strengths, weaknesses, opportunities, and threats impacting the
company’s position and growth prospects. Provides strategic insights into internal
and external factors.
6. Make recommendations: Provide data-driven strategic recommendations to
leverage strengths, address weaknesses, capitalize on opportunities and mitigate
threats. Assess risks and costs/benefits to drive growth and shareholder value.
By taking a 360-degree view of the internal strengths/weaknesses and external
opportunities/threats impacting a company, analysts provide management with
actionable strategies to leverage advantages, address challenges, and pursue
optimal positioning. This comprehensive 6-step analysis empowers firms with the
insights needed to drive growth and shareholder value.
1. Core Financial Documents
Core financial documents like balance sheets, income statements, and cash flow
statements provide critical data to analyse a company’s financial health. The balance
sheet shows assets, liabilities and equity. The income statement reports revenues,
expenses and profit/loss. The cash flow statement tracks operating, investing and
financing cash flows. These statements help investors determine a company’s
strengths, weaknesses, and overall performance. Thorough analysis of these core
documents offers vital insights for investment decisions and stock valuations.
Company Financial Reports
A company financial report is a formal document that publicly discloses a company’s
financial performance over a specific time period, usually annually or quarterly. It
includes detailed information on a company’s financial statements, such as the
balance sheet, income statement, cash flow statement, and statement of
shareholders’ equity.
Company financial reports help investors analyse and evaluate a company’s
financial health and operations. By reviewing the reports, investors assess metrics
like revenue growth, profitability, debt levels, and cash flow. This analysis helps
investors determine the company’s financial strength and growth prospects, which
informs investment decisions. Company financial reports typically are found on the
investor relations section of a company’s website or on financial websites. Publicly
traded companies are legally required to file these reports regularly with regulatory
bodies like the SEC, making them accessible to current and prospective
shareholders. Thorough analysis of financial reports is an essential part of
conducting due diligence before investing in a company’s stock.
Balance Sheet Analysis
Balance sheet analysis involves reviewing and evaluating all the items on a
company’s balance sheet to assess its financial health and stability.
Balance sheet analysis helps investors determine the company’s liquidity, leverage,
solvency, efficiency, and risk. By studying metrics like the current ratio, debt-to-
equity ratio, and working capital, investors evaluate the company’s ability to pay
debts, fund operations, and determine an optimal capital structure. Balance sheets
are found in a company’s annual and quarterly financial reports. In India, an investor
finds a company’s latest balance sheets in its annual reports available on stock
exchanges like NSE and BSE. Investors also find balance sheets on financial
websites and stock market platforms. Thorough balance sheet analysis is critical for
stock investors to understand a company’s financial position and make informed
investment decisions. It provides vital insights into the company’s financial viability
both currently and for future profitability and growth potential.
Income Statement Analysis
Income statement analysis involves reviewing and evaluating all components of a
company’s income statement to assess its financial performance.
Income statement analysis helps investors understand the drivers of a company’s
profitability, including factors like revenue growth, cost management, taxation, and
extraordinary gains or losses. Key metrics assessed include gross margin, operating
margin, EPS, EBITDA, and net income. This analysis determines the efficiency and
stability of a company’s operations and profitability. In India, an investor finds a
company’s latest income statements in its quarterly and annual reports available on
stock exchanges like NSE and BSE. Thorough income statement analysis is
important for stock investors to estimate future profitability and cash flows, which
directly impacts share price valuation. It provides critical insights into sales trends,
cost structures, and management’s ability to generate returns for shareholders.
Cash Flow Statement Analysis
Cash flow statement analysis involves reviewing all cash inflows and outflows to
assess a company’s liquidity, solvency, and financial health.
Analysis of the cash flow statement helps investors evaluate a company’s ability to
generate cash from operations, meet financial obligations, pay dividends, and fund
capital expenditures. Key metrics assessed include operating cash flow, free cash
flow, cash conversion cycle, and cash flow from financing activities. The cash flow
statement provides insights into financial flexibility, cash reserves, and the ability to
return value to shareholders. High cash flow indicates the company easily meets
obligations, reinvest in operations, and returns cash to shareholders. In India, an
investor finds the latest cash flow statements in quarterly and annual reports of
companies listed on stock exchanges like NSE and BSE. As cash is vital for day-to-
day business functions, thorough cash flow analysis is imperative for stock investors
to determine the company’s financial viability and value. It provides a clearer picture
of financial health than income statements or balance sheets alone.
2. Financial Performance Metrics
Financial ratios provide critical insights for analysing a company’s performance. Key
ratio categories like profitability, leverage, liquidity, valuation, and revenue ratios
assess profit margins, debt levels, cash flow, stock price valuation, and sales growth.
Examining trends in these ratios over time allows investors to gauge a company’s
financial health and growth prospects. Ratio analysis enables benchmarking to
competitors and industry averages.
Financial Ratios
Financial ratios refer to mathematical metrics calculated from a company’s financial
statements like the balance sheet, income statement, and cash flow
statement. Analysis of financial ratios helps investors thoroughly evaluate a company
for investment decisions. Key ratios such as debt-to-equity, current ratio, return on
equity, earnings per share, price-to-earnings, and dividend yield provide insights into
a company’s profitability, liquidity, leverage, and operations.
In India, an investor calculates these financial ratios using the financial statements
published in company annual and quarterly reports available on stock exchange
websites like BSE and NSE. Tracking how ratios change over time for a company
indicates improving or deteriorating financial health. Overall, financial ratio analysis
enables more informed stock investing by revealing aspects of a company’s
performance. Investors use these ratios to compare similar companies as well.
Profitability Ratio Analysis
Profitability Ratios Analysis refers to financial metrics that assess a company’s ability
to generate profits relative to revenue, assets, operating costs, and equity. It helps in
company analysis for stock market investors by providing insights into management
efficiency, pricing power, and overall profitability. Some key profitability ratios include
gross profit margin, operating profit margin, net profit margin, return on assets, and
return on equity. These are found in a company’s financial statements such as the
income statement and balance sheet. Investors compare these ratios over time and
against industry averages to evaluate the company’s financial health and earnings
potential.
These ratios give clarity on how well a company converts sales and investments into
bottom-line profits. Assessing a firm’s profitability is crucial for stock valuation and
identifying companies with strong fundamentals suitable for long-term investment.
Thus, profitability ratio analysis offers valuable insights for equity analysis and stock
selection in the Indian market. Investors should examine profitability ratios as part of
due diligence before investing in any Indian company.
Leverage Ratio Analysis
Leverage Ratios Analysis refers to metrics that measure the extent to which a
company uses debt financing to fund operations and growth. It helps in company
analysis for stock investors by assessing financial risk, debt repayment capacity, and
capital structure efficiency. Key leverage ratios include debt-to-equity, debt-to-
assets, and interest coverage ratio. These are calculated using balance sheet data
and income statement figures.
Leverage ratio analysis reveals how dependent a firm is on debt and its ability to
service those obligations. Higher leverage indicates greater financial risk. However,
prudent debt use also boosts returns. Investors should compare leverage ratios to
industry benchmarks and evaluate trends over time. Firms with high or rising
leverage face lending constraints and higher capital costs. Overall, leverage ratio
analysis is crucial for assessing the impact of debt on equity returns and weighing
financial risks against growth potential. Examining leverage metrics helps determine
optimal capital structure and avoids investing in over-leveraged or distressed firms
when analysing Indian stocks.
Operating Ratio Analysis
Operating Ratio Analysis refers to evaluating the operating efficiency and cost
management of a company. It measures the cost of operating a business as a
percentage of revenue and helps assess profitability potential. The operating ratio is
calculated by dividing operating expenses by net sales, using figures from the
income statement.
The operating ratio helps gauge how well a firm controls costs and generates profits
from its core operations. A lower ratio is preferable as it indicates a higher portion of
revenue is left over after operating costs are covered. Investors should compare
a company’s operating ratio to competitors and observe trends over time. Firms with
low or improving operating ratios tend to have higher operating margins and bottom-
line profitability. However, very low ratios indicate underinvestment as well. Overall,
operating ratio analysis reveals management effectiveness in managing expenses
and optimising productivity. Evaluating operating efficiency is key for identifying
quality companies with earnings growth potential when analysing Indian equities.
Valuation Ratio Analysis
Valuation Ratio Analysis refers to metrics that assess the value of a company’s stock
price relative to financial fundamentals such as earnings and book value. It helps
determine if a stock is undervalued or overvalued. Common valuation ratios include
the price-to-earnings (P/E), price-to-book (P/B), and price-to-sales (P/S) ratios.
These are calculated by dividing the current stock price by relevant fundamentals per
share.
Valuation ratios offer critical insights into the relationship between share price and
financial performance. Comparing these ratios to past trends, industry averages, and
benchmarks helps identify under or overvalued stocks. High growth firms justify
higher valuation multiples. However, extremely high ratios signal overvaluation risks.
Investors should focus on reasonably valued stocks with strong financials. Valuation
ratio analysis is indispensable for making informed investment decisions and
appropriate entry/exit timing when selecting Indian equities. Prudent valuation
analysis helps avoid speculation, set return expectations, and pick stocks with sound
fundamentals trading at rational prices.
Liquidity Ratio Analysis
Liquidity Ratio Analysis refers to metrics that measure a company’s ability to meet its
short-term financial obligations and fund ongoing operations. It evaluates the
availability of cash and liquid assets to cover current liabilities. Key liquidity ratios are
the current ratio and quick ratio, calculated using balance sheet figures.
Liquidity ratio analysis assesses a firm’s financial health and resilience to liquidity
shocks. Companies with low liquidity struggle to service debt, pay bills, and sustain
operations without external financing. Comparing liquidity ratios to industry averages
reveals if a firm has sufficient working capital relative to peers. Evaluating liquidity
ratio trends over time is also insightful. Overall, high liquidity indicates financial
stability and lower insolvency risks. However, excessive liquidity signals suboptimal
capital allocation. Investors should aim for Indian stocks with prudent liquidity levels
to balance growth and risk. Liquidity ratio analysis is vital for avoiding stocks at risk
of financial distress or bankruptcy when selecting equities in the Indian market.
Revenue Analysis
Revenue analysis involves examining trends in a company’s total sales and revenue
streams over time. Investors analyse revenue growth rates, revenue mix across
business segments, and performance by geography. Revenue trends provide insight
into demand for the company’s products or services. Higher revenues with strong
growth signal positive customer traction.
Investors find revenue figures on the income statement and in earnings reports.
Assessing sales growth trajectories helps gauge market share gains or losses.
Declining revenues indicates competitive challenges or market saturation.
Comparing revenue trends to peers shows how the company is performing relative
to rivals. Robust revenue growth supports higher profitability and stock valuations.
Weak revenues raise concerns about the company’s competitive position. Revenue
analysis is critical for evaluating the company’s core business performance and
growth outlook when researching a stock.
Earnings Analysis
Earnings analysis involves evaluating trends in a company’s net income and EPS.
Investors examine earnings growth rates over time and versus projections. Rising
earnings signal greater profitability and upside potential for the stock price. Earnings
figures are found on the income statement and in quarterly/annual earnings reports.
Comparing earnings performance to peers benchmarks the company against
rivals. Analysing earnings by business segment provides insights into which divisions
are driving profits. Examining EPS trends adjusts for changes in the share count.
Strong and accelerating earnings growth supports higher valuation multiples.
Conversely, declining or weak earnings raise concerns about the company’s profit
outlook. Earnings analysis is vital for assessing the company’s profit growth
trajectory and stock performance. Evaluating earnings trends enables investors to
gauge the business’s fundamental health when researching a stock.
3. Strategic and Operational Analysis
Strategic and Operational Analysis involves developing detailed reports and
analyses to evaluate a company’s current position and future prospects. This
includes SWOT reports, VRIO analysis, management reports, corporate profiles, and
analyses of industry character and dynamics. These provide critical insights into a
company’s internal strengths and weaknesses as well as external opportunities and
threats. The goal is to support strategic planning and decision-making.
SWOT Reports
SWOT reports refer to an analysis framework that evaluates a company’s internal
Strengths and Weaknesses as well as external Opportunities and Threats. It helps in
company analysis by providing a comprehensive look at a firm’s current strategic
position. SWOT reports are created by examining a company’s financial statements,
competitor analysis, economic conditions, and other quantitative and qualitative
factors.
SWOT reports help assess a company’s competitive positioning and future growth
potential. The strengths and weaknesses provide insights into a company’s financial
health, brand value, human resources, operational efficiency and other internal
factors. The opportunities and threats analyse market demand, competitive
landscape, regulations, access to capital and other external factors. SWOT reports
are useful for investment decisions as they identify areas of potential growth as well
as risks facing a company. Analysts and investors find SWOT information in equity
research reports, company annual reports and other financial databases.
VRIO Analysis
VRIO analysis is a useful framework for evaluating a company’s internal resources
and capabilities when analysing a stock. It allows you to identify strengths and
weaknesses within the company that could impact its future value and stock price.
The VRIO framework assesses if a company’s resources and capabilities are
Valuable, Rare, Costly to Imitate, and properly Organised. Valuable resources
enable a company to capitalise on opportunities and neutralise threats. Rare
resources are not commonly found among competitors. Resources that are
expensive to imitate due to history, causality, or patent leads to sustained
competitive advantage. Finally, the organisation must be set up in a way that allows
it to fully exploit those resources. Suppose a company possesses resources that
pass the VRIO criteria, they have the potential to be sources of continued
differentiation and market outperformance. Conducting a VRIO analysis provides
critical insights into factors that could affect a company’s future performance when
evaluating a potential stock investment.
Management Reports
Management reports are a valuable source of information for investors analysing a
stock. These reports are issued by company executives to communicate business
performance, strategies, and future outlooks.
The reports provide details on financial results, market conditions, new initiatives,
risks, and competition. They offer both data-driven insights as well as qualitative
perspectives from management. Investors use management reports to evaluate the
capabilities of company leadership, assess the plausibility of growth plans, and
gauge the overall direction of the business. The reports allow you to complement
quantitative stock research with the strategic visions and forward-looking statements
of management. Reviewing the latest management reports enables investors to
make more informed judgments on the future prospects of the company when
determining if the stock is a sound investment. The qualitative insights into
operations and plans for growth are invaluable for holistically assessing the strength
of the business.
Corporate Profile
A corporate profile provides a snapshot overview of a company’s business,
strategies, and leadership. Public companies publish corporate profiles on their
websites geared towards investors to highlight their operations, financials, products,
and growth opportunities.
While researching a stock, an investor should review the company’s corporate profile
to quickly learn about the core business, competitive advantages, key financial
metrics, and growth initiatives. The profile summarises the company’s vision, brand
positioning, management bios, and strategic direction. While portraying the company
in an optimistic light, the corporate profile allows an investor to efficiently understand
the basics of the business. The profile should be supplemented with SEC filings,
earnings reports, and other materials to complete the analysis. Reviewing the
corporate profile is an effective way for an investor to initially familiarise themselves
with a company when considering its stock.
Industry Character
Industry characteristics of a company provide critical insights when performing stock
analysis. Understanding the nature of the market environment enables you to better
assess growth opportunities, competitive threats, and risks that impact performance.
Information on industry characteristics are found in market research reports, trade
publications, regulatory filings, earnings calls, and company investor presentations.
Key industry characteristics to research include market size, growth rate, competition
level, regulation trends, technological disruptions, supply chain dynamics, and
threats from substitutes or new entrants. Analysing these factors reveals the overall
attractiveness of the industry. It also provides context on the barriers to entry,
bargaining power among suppliers and buyers, and profit potential. A company
thriving in a growing industry with limited direct competition and high barriers to entry
has a positive outlook. However, a challenging, saturated industry marked by intense
competition raises risks. Evaluating industry characteristics allows you to determine
if the macro-environment aligns with the company’s strengths and strategies to
support sustained stock price appreciation based on its positioning and prospects
within the overall market landscape.
4. Market and Product Analysis
Market and product analysis involves examining the demand and supply for a
product as well as pricing to determine the viability and potential profitability of selling
that product in a particular market. This includes assessing customer demand,
production costs, competitor pricing, and other factors to find the optimal price and
production level. The goal is to understand the dynamics between these factors to
make informed business decisions about entering or optimising operations in a
market.
Product Demand
Product Demand refers to the amount of a product or service that consumers are
willing and able to purchase at various prices during a certain time period. Analysing
product demand helps companies understand customer interests, gauge market
potential, and make informed decisions about production, inventory, and pricing.
Assessing product demand involves researching the number of active trading
accounts, trading volumes across different securities, interest in new offerings like
derivatives and ETFs, and overall capital flow into equity markets.
Companies utilise sources like brokerage account growth rates, trading data from
exchanges like NSE and BSE, consumer surveys, and macroeconomic factors to
estimate demand. Strong product demand indicates growing addressable market
size and business upside for firms. Factoring in elements like India’s demographics,
rising disposable incomes, and greater retail participation provides valuable
perspective on growth runways. Understanding product demand helps brokers,
exchanges, investment banks and other financial service providers identify
opportunities to launch new offerings, expand services, or invest in capabilities to
serve growing investor demand.
Product Supply
Product Supply refers to the amount of a product or service that producers are willing
and able to sell at various prices during a given period of time. Analysing product
supply helps companies understand industry dynamics, production costs,
competitive landscape, and pricing power. Product supply involves the availability of
different securities like equities, derivatives, bonds, ETFs, and other instruments
offered by exchanges, brokers, investment banks etc.
Companies assess supply factors like exchange listings, brokerage services,
research coverage, and assets under management to estimate the availability of
investible products. Robust product supply indicates market depth, healthy
competition and choice for investors. Data from exchanges, regulators and industry
associations on listings, turnover, registered intermediaries and folios provides
insights into supply. Adequate supply that matches investor demand supports
efficient price discovery and liquidity. For brokers and exchanges, monitoring supply
across asset classes and market participants helps align service capabilities, product
development and capacity expansion to tap growth opportunities.
Pricing
Pricing refers to the process of setting a monetary value for a product or service to
be bought and sold in the market. Analysing pricing helps companies determine
optimal rates that cover costs and maximise profitability. Pricing analysis examines
brokerage commissions, exchange fees, research subscription charges, interest
rates, and other service costs.
Companies study pricing trends, competitor rates, consumer willingness to pay,
overhead expenses and value perceptions to set suitable prices. Favourable pricing
that aligns with perceived value attracts investors, stimulates trading activity and
enhances market depth. Exchanges and brokers refers to filings, service portals, and
regulatory disclosures to estimate pricing levels across segments. Models like cost-
plus pricing and dynamic pricing based on demand and supply factors also aid
pricing strategies. Optimal pricing enables financial service providers to expand the
addressable market, increase profit margins and maintain competitive edge.
Monitoring of pricing across asset classes and market participants along with open
feedback forums allows companies to refine pricing approaches in line with Indian
stock market dynamics.
5. External Insights and Forecasts
External Insights and Forecasts involves gathering information from outside sources
to gain new perspectives. This includes Analyst Reports, Earning Calls, Articles, and
Valuation Analysis. Integrating these external insights provides diverse viewpoints to
supplement internal data and forecasts
