TFI 006: How to Analyze a Company

Basic framework about how to analyze a company and the fThe Free Investorsour pillars of analyzing a company:

A. The Business: What do they do?

  1. Segment analysis
    • Growth prospects
    • Revenue drivers
    • Cost drivers
  2. Power Paradigm
    • Reliance on major customers
    • Reliance on major suppliers
    • Threat of substitutes
      • Intra Industry
      • Inter Industry
  3. Competition
    • Barrier to entry
    • Competitive advantages
  4. Experience in the industry
  5. Brand: Pricing power
  6. Management team
  7. Customer service
  8. Product quality
  9. Ownership structure
  10. Order backlog
  11. Environmental, Legal, Tax and Regulatory issues

B. Financials: How is the financial health?

  1. Look at financial over time…. may be 5-10 years
  2. Income statement
    • Revenue
    • Cost – in line with revenue?
    • Tax rate
    • Interest expense
  3. Balance sheet
    • Cash and equivalent
    • Debt
    • Lease
    • Capital expenditure
    • Compensation – Options expense etc
  4. Cashflow statement (Important)
    • Operating cashflow (Important)
      • Free cashflow
    • Financing cashflow
    • Investing cashflow

C. Valuation: What’s it worth?

  1. Range of scenarios
  2. It is just one data point
  3. It is better to be roughly/vaguely right than precisely wrong.

D. Risks: What can go wrong?

  1. Annual report / SEC filings

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