Chapter 9 - Company Analysis : Introduction

Hanumant Dhokle

Whenever we are thinking of investing in a company it is vital that we understand what it does, its market and the industry in which it operates. We should never blindly invest in a company. So company analysis is an important segment of fundamental analysis. However whenever we come to the reality – though terms like basic, obvious, plain, simple—all of these words describe fundamentals in some way. But in practice it is not so obvious or plain as it sounds. What is company analysis? It is the analysis of information (financial, operational and functional) related to a company to arrive at risk and return prospects for a period of time. Company analysis can also be termed as business analysis which gives the analysis of minute details of the company as well as its business processes in different dimensions. The tools of company analysis are as follows:

Financial

  • Financial Statement Analysis
  • Financial Ratio Analysis

Non-Financial

  • Management
  • Product or Service
  • Level of Competency
  • Innovation
  • Productivity
  • Technology
  • Competitive Edge
  • Promoters Holdings
  • Corporate Information
  • Market Share
  • Expansion Plans

The non-financial parameters of company analysis are equally important as financial parameters but all of them cannot be quantified. Some of them provide important information about the quality of the company. For example, a higher stake of promoters in a company indicates a greater level of interest of the promoters in the company and more scope for dividend and long-term growth. In the same manner, if a company has a policy of innovation and has superior technology, it indicates that the company is ahead of its competitors in terms of business plans and ideas and possesses Competitive advantage through technology. For example, ICICI Bank has carried out innovations in retail banking with technology and has set standards for other banks in this segment. With a shortlist of 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.

  1. Business Plan
    The business plan, model or concept forms the bedrock upon which everything is built. If the plan, model or concepts stink, there is little hope for the business. For a new business the questions may be: Does this 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?
  2. 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. Alternatively, strong management can make for extraordinary success in a mature industry. Some of the questions to ask might include: How talented is the management team? Do they have a track record? How long have they worked together? Can the management deliver as per their commitment? If management is a problem, it is sometimes best to move on. How to ascertain the future share price of the company? There are many different valuation metrics and much depends on the industry and stage of the economic cycle.
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