Don’t Invest if You Don’t Know this – Company Analysis Part 1

Hello readers, it has been more than a week since my last article. I have been busy writing article on “HOW TO ANALYSE A COMPANY?”  and finally here it is. I am going split this article into two parts so that it would be much easier for you to read and understand. So let’s get started with our topic of company 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, before investing, the investor should make some analysis to end up with the correct 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. For now, let us stick to the qualitative analysis, in the next article quantitative analysis will be explained.

Qualitative Analysis involves analysing a company business model, management and competitive advantage.

1. Understand the Business

  • Don’t invest if you don’t understand the business and how it is generating income.
  • Read the business model.
  • The business model of a company involves “ what the company is doing?, How it is generating income?, Who are the targeted customers?”
  • After analysing the business model investor 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, etc”
Understand the business model

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

If a company has an edge over its competitors that the company is experiencing a Competitive Advantage in that sector. Having a competitive advantage can improve sales and services and bring more profits when to compared to other companies in the same sector.

Competitive advantage

A company can enjoy competitive advantage if it has characteristics like the strong track record, strong and ethical management, the 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) which 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 company is said to have a differential advantage.

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

Management Quality

The investor should ask questions like who is the management?,
What is the education background of the 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
In this article, you have read about three topics of Qualitative analysis. Next article is going to be on Quantitative Analysis which completes our topic of Company Analysis.

Consider reading PART2 of this article to get a complete overview of the analysis. To cover the topic of Top-Down Analysis in a chronological manner click me

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