Company Analysis for Long Term Investors

Hello readers, in this article, I am going to talk about company analysis for long term investors. I will also go through the steps involved in it. Company analysis usually divided into two parts i.e., qualitative and quantitative analysis.

If you decide to invest in a company that means you are about to become part of the ownership in that company. In that case, the investor should carry out an analysis before making any decision. So let me explain to you how to do that in a proper manner.

Qualitative and Quantitative analysis should be performed to complete the company analysis. Long term investors should carry out both analyses for the final result. Let us start with qualitative analysis.

Qualitative Analysis

While performing qualitative analysis investors should go through the company business model, management and competitive advantage.

1. Understand the Business

  • Don’t invest if you don’t understand the business and its income generation sources.
  • Go through the business model.
  • The business model of a company involves “what the company is doing? How is it generating income? Who are the targeted customers?” These can be helpful for analysis.
  • After analysing the business model, long term investors should have to come up with a few more questions like “Does this business model work in the future? Does this idea make sense? How macro and microeconomics affect the business? ”

There are thousands of companies in the stock market. Instead of more diversification, it is better to invest in those companies whose business you can understand.

2. Competitive Advantage

A company is said to have a competitive advantage if it has an edge over its competitors. Having a competitive advantage can improve sales and services and bring more profits when compared to other companies in the same sector.

A company can enjoy a competitive advantage if it has characteristics like a strong track record, strong and ethical management, a monopoly in a particular industry, technology superiority, better cost structure than competitors.

The main types of competitive advantages are Comparative Advantage and Differential Advantage.

Comparative Advantage

Let us say there is a store (X) that offers household products at some fixed price. But there is another store (Y) in the same locality which is offering the same products at a discounted price.

In the above situation, the consumers prefer the store which is offering the same products at a discounted price. The store (Y) has a competitive advantage over (X) because of discount prices. This drives more customers into the store and increases sales.

Differential Advantage

If a company provides more superior products or products with more features at the same price than its competitors then such a company is said to have a differential advantage.

Let us say company X offers a mobile phone having a quad-core processor at a Price of Rs.5000. But another company Y offering octa-core processor mobile phones at the same price then consumers prefer company Y over X. ( Just an example please don’t compare iPhone features over the android phones. In this case, the good brand building provides an advantage to Apple).

3. Management Quality

Strong and ethical management provides a good foundation for the company. The investor should do research on the management of the company before investing.

The investor should ask questions like who is the management?

What is the educational background of management? Who plays important roles like CEO, CFO, COO in the company? What are the past experiences of these people? What is the vision and goals of the management? Etc.,

“I look for integrity, energy, and intelligence in management” – Warren Buffet

Quantitative Analysis

In our article “company analysis for long term investors”, quantitative analysis is the second part. If I want to invest in a company, the first thing I do is Qualitative Analysis. Later on, I will check the past performance of that company using financial statements. In simple terms, analysing the financials of a company is called quantitative analysis. Without quantitative analysis, we cannot completely analyse a company.

Financial Statements play a major role in quantitative analysis. This Statement includes

  • Balance Sheet
  • Income Statement
  • Cash Flow Statements

 1. Balance Sheet

The Balance Sheet gives information about Assets and Liabilities. If you want to read more about assets and liabilities you can read it here – assets and liabilities.

The Assets column includes information about Fixed assets and Current assets. Whereas Liabilities include Current liabilities, Long Term Debt, Shareholders Equity.

In a balance sheet Assets should always match with Liabilities according to the Double-entry accounting rule.

2. Income Statement

The income statement ( Profit and Loss Statement) gives information about the revenues, expenses, Profit of the company.

Inside the income statement, you can observe terms like operating costs, Profit before tax, Depreciation and amortization and a few more. Most of these terms will be self-explanatory.

After analysing all these investors can come to know the performance of the business in that quarter. He can also compare it with the previous quarters to measure the growth or decline in revenues.

3. Cash Flow Statement

This is my favourite one. Whatever business you do, at the end of a quarter or a financial year what comes into count is “How much money got into your Pocket”. Using a cash flow statement one can analyse that.

The cash flow statement gives information about the Cash Flows of

  1. Operating Activities
  2. Investing Activities
  3. Financing Activities

Let us say a company sold machinery with a profit of 5 lakh rupees but the sale is done on credit. In this case, the income statement shows the profit of Rs.5 Lakhs but there will be no money with the company. Transactions like this will be mentioned in the Cash Flow Statement.

Quantitative analysts derive some useful ratios using the data in the balance sheet, income statement and cash flow statements. Ex- Liquidity, Solvency, Profitability, Debt Ratios.


Do not invest in companies you can’t understand. Perform company analysis before making any investment decision. Quantitative and qualitative analysis is the major part of the company analysis. Perform them well for better results. It is never too late to invest to safeguard your future. So, what are you waiting for? Click here to open a demat account with Upstox. By saying this, I will end this article – “Company analysis for long term investors”. To learn about PE ratio, click here

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