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Investors use company analysis to analyse stocks by gathering information about the firm’s profile, products and services, as well as profitability. ‘Fundamental analysis’ is another name for it. A company analysis includes basic information about the business, such as the mission statement and apparition, as well as the organization’s goals and values. During the company analysis process, an investor takes into account the firm’s history, focusing on events that have shaped the company.
A company analysis investigates the company’s products and services. If the company is involved in manufacturing, the study looks at the products it produces as well as the demand for and quality of those products. In a service business, on the other hand, the investor examines the services offered.
How To Do A Company Analysis?
In order to gain strategic insight, a firm study must be comprehensive. The company analysis, as a detailed study of an organization, provides insight into how to streamline procedures and improve revenue potentials.
- Determine the economic characteristics of the company and the industry in which it works:
We must first learn about the company and the industry in which it operates. Try to find a quick overview of the company’s history and current status, as well as the locations and number of manufacturing facilities it operates, as well as some industry-specific information.
- Recognize and identify the items and/or services:
Following the understanding of the company’s overview, examine the products and services that the company provides to its clients. We must also consider the nature of the firm’s product, its distinctiveness, demand and supply dynamics, and brand awareness in the geographic area in which it operates.
- Understanding the company’s risks and concerns:
Every firm and sector has its own set of dangers and issues that might affect the company’s performance and profitability. As a result, it is critical for an investor to understand the risks that the company faces in the event of a disaster. We must also investigate and assess to what degree that particular risk will harm the business and whether the organisation will be able to overcome it. The risks and problems that the company is exposed to are also detailed in the Annual Report.
- Financial Statement Analysis:
This is one of the most crucial aspects in the process of analysing a firm. The financial statement, which is a crucial aspect, provides us with the true quantitative image of any organisation. We look at the margins, the topline, and the bottom line while reviewing the Income Statements. The Balance Sheet gives us an indication of how financially sound the organisation is. The cash balance created by the company’s operating, investing, and financing activities is depicted in detail in the Cash Flow Statements. It aids in determining the firm’s liquidity situation. Finally, compare the ratios to previous periods or other industry participants.
Company Analysis Methodologies:
There are two types of corporate analysis:
1. Top-Down Strategy:
When using the top down approach, investors begin by examining macroeconomic fundamentals such as monetary policy, inflation, economic growth, and broader events before delving into individual stocks. The investor searches for market conditions and occurrences and tries to comprehend the opportunities that might be gained from them.
For example, The Elections in India is the most talked about event. Therefore, the election is the event/theme which the investor in this approach will look at for capturing the opportunity. Most top-down investors are macroeconomic investors, focused on capitalizing on large cyclical trends rather than individual equities.
This means that their strategy is more about capitalizing on macro momentum and short-term gains than any kind of value-based approach to find undervalued companies.
2. Bottom-Up Technique:
In this approach, we begin by examining individual companies and then constructing a portfolio based on their distinctive characteristics.
In this approach of investing, investors tend to concentrate on microeconomic aspects. They select their stocks on the basis of their stock selection criteria like price to earnings multiples, debt to equity ratio, cash flows, management quality etc.
Investors can learn about a company’s overall health by looking at its financial situation. Any serious investor trying to properly understand and value a company should conduct a financial study of the company’s financial statements as well as the footnotes in the annual report.
