Company Analysis: Definition, Importance, How to do, Example, Limitations

Company analysis is a rigorous analysis of key financial documents, metrics, strategies, market dynamics and external insights, investors can develop a holistic understanding of a company’s operations, value drivers and potential risks. Company analysis allows investors to make well-informed judgments about a company’s viability, financial health and ability to generate profitability and returns over the long run. 

Effective company analysis involves studying a variety of qualitative and quantitative factors. Investors analyze key documents such as annual reports, balance sheets, income statements and cash flow statements to discern historical performance, financial position and operational cash generation. In addition, they examine critical financial ratios, growth rates, margins and valuation multiples to assess management efficiency, profitability, leverage and overall value. Strategic overviews of the business model, competitive landscape, management team and future plans provide invaluable context about positioning and strategies. And, they also assess important industry or market dynamics that present opportunities or threats.

By taking a multi-dimensional research-based approach across all these operational, financial and external aspects, investors arm themselves with comprehensive insights into a company’s current realities and future prospects. This supports prudent investment decisions that can potentially deliver optimal risk-adjusted returns. Thorough company analysis forms the foundation for making well-informed choices for portfolio construction and stock market participation.

What is company analysis?

Company analysis refers to the detailed study of a company’s operations, financials, management, products and services, competitors, market position, and industry trends. Company analysis is an essential part of fundamental analysis that investors conduct before deciding to invest in a company’s stock. The goal of company analysis is to gain a comprehensive understanding of the business so investors determine if the stock is undervalued or overvalued compared to its true worth.

What is the importance of company analysis?

The importance of company analysis is that it provides the tools and data for investors to make smart stock picks. Scrutinizing a company is due diligence that reduces some of the hazards in stock investing. The more you know before you buy a stock, the better your odds of picking a security with the best potential returns. Rigorous company analysis provides investors with intimate knowledge of the business. By familiarizing themselves with how the company operates; its financials, products, markets, competitors and management, investors understand more about the particular drivers of the company’s profits and what it stands to lose.

This knowledge enables them to make informed projections of future performance, and to consider whether the current stock price reflects too much, too little, or just the right amount of risk and future profit. A company’s income statement, balance sheet, and cash flow statement provide impartial data about the firm’s past performance. Key financial ratios over time reveal the company’s operating trends. Any red flags are more readily apparent, and the stock can be valued using financial techniques such as discounted cash flow modelling. This yields a fundamental, or equilibrium, value against which the market price can be compared.

How to do a company analysis?

Company analysis involves a multi-step process examining all aspects of the business to provide data-driven strategic recommendations. It is crucial for understanding a firm’s current position and growth opportunities. The steps to be followed are given below.

1. Research the company’s industry and competitors: Analyse the industry landscape, including size, growth, regulations, and technology trends. Identify key competitors and perform competitive benchmarking on market share, strengths, weaknesses, and advantages versus the company. This provides insight into the external environment and competitive positioning.  

2. Examine the company’s business model and operations: Evaluate the company’s target markets, products/services, distribution, supply chain, partnerships, manufacturing processes, assets, and resource utilisation. Assess operational efficiency and productivity. The goal is to understand the company’s core businesses, operating model, and how efficiently it delivers value.

3.Review financial statements and performance: Analyze past financial statements (balance sheet, income statement, cash flow statement) over 3-5 years. Calculate and benchmark key financial ratios against competitors. Identify positive/negative trends in revenues, profits, debt, and other metrics. 

4. Assess management and leadership: Research the background of executives/board and their strategy. Evaluate leadership qualifications, track record, vision, and governance policies. This provides insight into management’s capabilities and alignment with shareholders.

5. Conduct a SWOT analysis: Based on preceding research, perform a SWOT highlighting key strengths, weaknesses, opportunities, and threats impacting the company’s position and growth prospects. Provides strategic insights into internal and external factors.

6. Make recommendations: Provide data-driven strategic recommendations to leverage strengths, address weaknesses, capitalize on opportunities and mitigate threats. Assess risks and costs/benefits to drive growth and shareholder value.

By taking a 360-degree view of the internal strengths/weaknesses and external opportunities/threats impacting a company, analysts provide management with actionable strategies to leverage advantages, address challenges, and pursue optimal positioning. This comprehensive 6-step analysis empowers firms with the insights needed to drive growth and shareholder value.

1. Core Financial Documents

Core financial documents like balance sheets, income statements, and cash flow statements provide critical data to analyse a company’s financial health. The balance sheet shows assets, liabilities and equity. The income statement reports revenues, expenses and profit/loss. The cash flow statement tracks operating, investing and financing cash flows. These statements help investors determine a company’s strengths, weaknesses, and overall performance. Thorough analysis of these core documents offers vital insights for investment decisions and stock valuations.

Company Financial Reports

A company financial report is a formal document that publicly discloses a company’s financial performance over a specific time period, usually annually or quarterly. It includes detailed information on a company’s financial statements, such as the balance sheet, income statement, cash flow statement, and statement of shareholders’ equity. 

Company financial reports help investors analyse and evaluate a company’s financial health and operations. By reviewing the reports, investors assess metrics like revenue growth, profitability, debt levels, and cash flow. This analysis helps investors determine the company’s financial strength and growth prospects, which informs investment decisions. Company financial reports typically are found on the investor relations section of a company’s website or on financial websites. Publicly traded companies are legally required to file these reports regularly with regulatory bodies like the SEC, making them accessible to current and prospective shareholders. Thorough analysis of financial reports is an essential part of conducting due diligence before investing in a company’s stock.

Balance Sheet Analysis

Balance sheet analysis involves reviewing and evaluating all the items on a company’s balance sheet to assess its financial health and stability. 

Balance sheet analysis helps investors determine the company’s liquidity, leverage, solvency, efficiency, and risk. By studying metrics like the current ratio, debt-to-equity ratio, and working capital, investors evaluate the company’s ability to pay debts, fund operations, and determine an optimal capital structure. Balance sheets are found in a company’s annual and quarterly financial reports. In India, an investor finds a company’s latest balance sheets in its annual reports available on stock exchanges like NSE and BSE. Investors also find balance sheets on financial websites and stock market platforms. Thorough balance sheet analysis is critical for stock investors to understand a company’s financial position and make informed investment decisions. It provides vital insights into the company’s financial viability both currently and for future profitability and growth potential.

Income Statement Analysis

Income statement analysis involves reviewing and evaluating all components of a company’s income statement to assess its financial performance. 

Income statement analysis helps investors understand the drivers of a company’s profitability, including factors like revenue growth, cost management, taxation, and extraordinary gains or losses. Key metrics assessed include gross margin, operating margin, EPS, EBITDA, and net income. This analysis determines the efficiency and stability of a company’s operations and profitability. In India, an investor finds a company’s latest income statements in its quarterly and annual reports available on stock exchanges like NSE and BSE. Thorough income statement analysis is important for stock investors to estimate future profitability and cash flows, which directly impacts share price valuation. It provides critical insights into sales trends, cost structures, and management’s ability to generate returns for shareholders.

Cash Flow Statement Analysis

Cash flow statement analysis involves reviewing all cash inflows and outflows to assess a company’s liquidity, solvency, and financial health. 

Analysis of the cash flow statement helps investors evaluate a company’s ability to generate cash from operations, meet financial obligations, pay dividends, and fund capital expenditures. Key metrics assessed include operating cash flow, free cash flow, cash conversion cycle, and cash flow from financing activities. The cash flow statement provides insights into financial flexibility, cash reserves, and the ability to return value to shareholders. High cash flow indicates the company easily meets obligations, reinvest in operations, and returns cash to shareholders. In India, an investor finds the latest cash flow statements in quarterly and annual reports of companies listed on stock exchanges like NSE and BSE. As cash is vital for day-to-day business functions, thorough cash flow analysis is imperative for stock investors to determine the company’s financial viability and value. It provides a clearer picture of financial health than income statements or balance sheets alone.

2. Financial Performance Metrics

Financial ratios provide critical insights for analysing a company’s performance. Key ratio categories like profitability, leverage, liquidity, valuation, and revenue ratios assess profit margins, debt levels, cash flow, stock price valuation, and sales growth. Examining trends in these ratios over time allows investors to gauge a company’s financial health and growth prospects. Ratio analysis enables benchmarking to competitors and industry averages. 

Financial Ratios

Financial ratios refer to mathematical metrics calculated from a company’s financial statements like the balance sheet, income statement, and cash flow statement. Analysis of financial ratios helps investors thoroughly evaluate a company for investment decisions. Key ratios such as debt-to-equity, current ratio, return on equity, earnings per share, price-to-earnings, and dividend yield provide insights into a company’s profitability, liquidity, leverage, and operations. 

In India, an investor calculates these financial ratios using the financial statements published in company annual and quarterly reports available on stock exchange websites like BSE and NSE. Tracking how ratios change over time for a company indicates improving or deteriorating financial health. Overall, financial ratio analysis enables more informed stock investing by revealing aspects of a company’s performance. Investors use these ratios to compare similar companies as well.

Profitability Ratio Analysis

Profitability Ratios Analysis refers to financial metrics that assess a company’s ability to generate profits relative to revenue, assets, operating costs, and equity. It helps in company analysis for stock market investors by providing insights into management efficiency, pricing power, and overall profitability. Some key profitability ratios include gross profit margin, operating profit margin, net profit margin, return on assets, and return on equity. These are found in a company’s financial statements such as the income statement and balance sheet. Investors compare these ratios over time and against industry averages to evaluate the company’s financial health and earnings potential. 

These ratios give clarity on how well a company converts sales and investments into bottom-line profits. Assessing a firm’s profitability is crucial for stock valuation and identifying companies with strong fundamentals suitable for long-term investment. Thus, profitability ratio analysis offers valuable insights for equity analysis and stock selection in the Indian market. Investors should examine profitability ratios as part of due diligence before investing in any Indian company.

Leverage Ratio Analysis

Leverage Ratios Analysis refers to metrics that measure the extent to which a company uses debt financing to fund operations and growth. It helps in company analysis for stock investors by assessing financial risk, debt repayment capacity, and capital structure efficiency. Key leverage ratios include debt-to-equity, debt-to-assets, and interest coverage ratio. These are calculated using balance sheet data and income statement figures. 

Leverage ratio analysis reveals how dependent a firm is on debt and its ability to service those obligations. Higher leverage indicates greater financial risk. However, prudent debt use also boosts returns. Investors should compare leverage ratios to industry benchmarks and evaluate trends over time. Firms with high or rising leverage face lending constraints and higher capital costs. Overall, leverage ratio analysis is crucial for assessing the impact of debt on equity returns and weighing financial risks against growth potential. Examining leverage metrics helps determine optimal capital structure and avoids investing in over-leveraged or distressed firms when analysing Indian stocks.

Operating Ratio Analysis

Operating Ratio Analysis refers to evaluating the operating efficiency and cost management of a company. It measures the cost of operating a business as a percentage of revenue and helps assess profitability potential. The operating ratio is calculated by dividing operating expenses by net sales, using figures from the income statement. 

The operating ratio helps gauge how well a firm controls costs and generates profits from its core operations. A lower ratio is preferable as it indicates a higher portion of revenue is left over after operating costs are covered. Investors should compare a company’s operating ratio to competitors and observe trends over time. Firms with low or improving operating ratios tend to have higher operating margins and bottom-line profitability. However, very low ratios indicate underinvestment as well. Overall, operating ratio analysis reveals management effectiveness in managing expenses and optimising productivity. Evaluating operating efficiency is key for identifying quality companies with earnings growth potential when analysing Indian equities.

Valuation Ratio Analysis

Valuation Ratio Analysis refers to metrics that assess the value of a company’s stock price relative to financial fundamentals such as earnings and book value. It helps determine if a stock is undervalued or overvalued. Common valuation ratios include the price-to-earnings (P/E), price-to-book (P/B), and price-to-sales (P/S) ratios. These are calculated by dividing the current stock price by relevant fundamentals per share.

Valuation ratios offer critical insights into the relationship between share price and financial performance. Comparing these ratios to past trends, industry averages, and benchmarks helps identify under or overvalued stocks. High growth firms justify higher valuation multiples. However, extremely high ratios signal overvaluation risks. Investors should focus on reasonably valued stocks with strong financials. Valuation ratio analysis is indispensable for making informed investment decisions and appropriate entry/exit timing when selecting Indian equities. Prudent valuation analysis helps avoid speculation, set return expectations, and pick stocks with sound fundamentals trading at rational prices.

Liquidity Ratio Analysis

Liquidity Ratio Analysis refers to metrics that measure a company’s ability to meet its short-term financial obligations and fund ongoing operations. It evaluates the availability of cash and liquid assets to cover current liabilities. Key liquidity ratios are the current ratio and quick ratio, calculated using balance sheet figures. 

Liquidity ratio analysis assesses a firm’s financial health and resilience to liquidity shocks. Companies with low liquidity struggle to service debt, pay bills, and sustain operations without external financing. Comparing liquidity ratios to industry averages reveals if a firm has sufficient working capital relative to peers. Evaluating liquidity ratio trends over time is also insightful. Overall, high liquidity indicates financial stability and lower insolvency risks. However, excessive liquidity signals suboptimal capital allocation. Investors should aim for Indian stocks with prudent liquidity levels to balance growth and risk. Liquidity ratio analysis is vital for avoiding stocks at risk of financial distress or bankruptcy when selecting equities in the Indian market.

Revenue Analysis

Revenue analysis involves examining trends in a company’s total sales and revenue streams over time. Investors analyse revenue growth rates, revenue mix across business segments, and performance by geography. Revenue trends provide insight into demand for the company’s products or services. Higher revenues with strong growth signal positive customer traction. 

Investors find revenue figures on the income statement and in earnings reports. Assessing sales growth trajectories helps gauge market share gains or losses. Declining revenues indicates competitive challenges or market saturation. Comparing revenue trends to peers shows how the company is performing relative to rivals. Robust revenue growth supports higher profitability and stock valuations. Weak revenues raise concerns about the company’s competitive position. Revenue analysis is critical for evaluating the company’s core business performance and growth outlook when researching a stock.

Earnings Analysis

Earnings analysis involves evaluating trends in a company’s net income and EPS. Investors examine earnings growth rates over time and versus projections. Rising earnings signal greater profitability and upside potential for the stock price. Earnings figures are found on the income statement and in quarterly/annual earnings reports. 

Comparing earnings performance to peers benchmarks the company against rivals. Analysing earnings by business segment provides insights into which divisions are driving profits. Examining EPS trends adjusts for changes in the share count. Strong and accelerating earnings growth supports higher valuation multiples. Conversely, declining or weak earnings raise concerns about the company’s profit outlook. Earnings analysis is vital for assessing the company’s profit growth trajectory and stock performance. Evaluating earnings trends enables investors to gauge the business’s fundamental health when researching a stock.

3. Strategic and Operational Analysis

Strategic and Operational Analysis involves developing detailed reports and analyses to evaluate a company’s current position and future prospects. This includes SWOT reports, VRIO analysis, management reports, corporate profiles, and analyses of industry character and dynamics. These provide critical insights into a company’s internal strengths and weaknesses as well as external opportunities and threats. The goal is to support strategic planning and decision-making.

SWOT Reports

SWOT reports refer to an analysis framework that evaluates a company’s internal Strengths and Weaknesses as well as external Opportunities and Threats. It helps in company analysis by providing a comprehensive look at a firm’s current strategic position. SWOT reports are created by examining a company’s financial statements, competitor analysis, economic conditions, and other quantitative and qualitative factors. 

SWOT reports help assess a company’s competitive positioning and future growth potential. The strengths and weaknesses provide insights into a company’s financial health, brand value, human resources, operational efficiency and other internal factors. The opportunities and threats analyse market demand, competitive landscape, regulations, access to capital and other external factors. SWOT reports are useful for investment decisions as they identify areas of potential growth as well as risks facing a company. Analysts and investors find SWOT information in equity research reports, company annual reports and other financial databases.

VRIO Analysis

VRIO analysis is a useful framework for evaluating a company’s internal resources and capabilities when analysing a stock. It allows you to identify strengths and weaknesses within the company that could impact its future value and stock price. 

The VRIO framework assesses if a company’s resources and capabilities are Valuable, Rare, Costly to Imitate, and properly Organised. Valuable resources enable a company to capitalise on opportunities and neutralise threats. Rare resources are not commonly found among competitors. Resources that are expensive to imitate due to history, causality, or patent leads to sustained competitive advantage. Finally, the organisation must be set up in a way that allows it to fully exploit those resources. Suppose a company possesses resources that pass the VRIO criteria, they have the potential to be sources of continued differentiation and market outperformance. Conducting a VRIO analysis provides critical insights into factors that could affect a company’s future performance when evaluating a potential stock investment.

Management Reports

Management reports are a valuable source of information for investors analysing a stock. These reports are issued by company executives to communicate business performance, strategies, and future outlooks. 

The reports provide details on financial results, market conditions, new initiatives, risks, and competition. They offer both data-driven insights as well as qualitative perspectives from management. Investors use management reports to evaluate the capabilities of company leadership, assess the plausibility of growth plans, and gauge the overall direction of the business. The reports allow you to complement quantitative stock research with the strategic visions and forward-looking statements of management. Reviewing the latest management reports enables investors to make more informed judgments on the future prospects of the company when determining if the stock is a sound investment. The qualitative insights into operations and plans for growth are invaluable for holistically assessing the strength of the business.

Corporate Profile

A corporate profile provides a snapshot overview of a company’s business, strategies, and leadership. Public companies publish corporate profiles on their websites geared towards investors to highlight their operations, financials, products, and growth opportunities.  

While researching a stock, an investor should review the company’s corporate profile to quickly learn about the core business, competitive advantages, key financial metrics, and growth initiatives. The profile summarises the company’s vision, brand positioning, management bios, and strategic direction. While portraying the company in an optimistic light, the corporate profile allows an investor to efficiently understand the basics of the business. The profile should be supplemented with SEC filings, earnings reports, and other materials to complete the analysis. Reviewing the corporate profile is an effective way for an investor to initially familiarise themselves with a company when considering its stock.

Industry Character

Industry characteristics of a company provide critical insights when performing stock analysis. Understanding the nature of the market environment enables you to better assess growth opportunities, competitive threats, and risks that impact performance. Information on industry characteristics are found in market research reports, trade publications, regulatory filings, earnings calls, and company investor presentations. 

Key industry characteristics to research include market size, growth rate, competition level, regulation trends, technological disruptions, supply chain dynamics, and threats from substitutes or new entrants. Analysing these factors reveals the overall attractiveness of the industry. It also provides context on the barriers to entry, bargaining power among suppliers and buyers, and profit potential. A company thriving in a growing industry with limited direct competition and high barriers to entry has a positive outlook. However, a challenging, saturated industry marked by intense competition raises risks. Evaluating industry characteristics allows you to determine if the macro-environment aligns with the company’s strengths and strategies to support sustained stock price appreciation based on its positioning and prospects within the overall market landscape.

4. Market and Product Analysis

Market and product analysis involves examining the demand and supply for a product as well as pricing to determine the viability and potential profitability of selling that product in a particular market. This includes assessing customer demand, production costs, competitor pricing, and other factors to find the optimal price and production level. The goal is to understand the dynamics between these factors to make informed business decisions about entering or optimising operations in a market.

Product Demand

Product Demand refers to the amount of a product or service that consumers are willing and able to purchase at various prices during a certain time period. Analysing product demand helps companies understand customer interests, gauge market potential, and make informed decisions about production, inventory, and pricing. Assessing product demand involves researching the number of active trading accounts, trading volumes across different securities, interest in new offerings like derivatives and ETFs, and overall capital flow into equity markets. 

Companies utilise sources like brokerage account growth rates, trading data from exchanges like NSE and BSE, consumer surveys, and macroeconomic factors to estimate demand. Strong product demand indicates growing addressable market size and business upside for firms. Factoring in elements like India’s demographics, rising disposable incomes, and greater retail participation provides valuable perspective on growth runways. Understanding product demand helps brokers, exchanges, investment banks and other financial service providers identify opportunities to launch new offerings, expand services, or invest in capabilities to serve growing investor demand.

Product Supply

Product Supply refers to the amount of a product or service that producers are willing and able to sell at various prices during a given period of time. Analysing product supply helps companies understand industry dynamics, production costs, competitive landscape, and pricing power. Product supply involves the availability of different securities like equities, derivatives, bonds, ETFs, and other instruments offered by exchanges, brokers, investment banks etc.  

Companies assess supply factors like exchange listings, brokerage services, research coverage, and assets under management to estimate the availability of investible products. Robust product supply indicates market depth, healthy competition and choice for investors. Data from exchanges, regulators and industry associations on listings, turnover, registered intermediaries and folios provides insights into supply. Adequate supply that matches investor demand supports efficient price discovery and liquidity. For brokers and exchanges, monitoring supply across asset classes and market participants helps align service capabilities, product development and capacity expansion to tap growth opportunities. 

Pricing

Pricing refers to the process of setting a monetary value for a product or service to be bought and sold in the market. Analysing pricing helps companies determine optimal rates that cover costs and maximise profitability. Pricing analysis examines brokerage commissions, exchange fees, research subscription charges, interest rates, and other service costs. 

Companies study pricing trends, competitor rates, consumer willingness to pay, overhead expenses and value perceptions to set suitable prices. Favourable pricing that aligns with perceived value attracts investors, stimulates trading activity and enhances market depth. Exchanges and brokers refers to filings, service portals, and regulatory disclosures to estimate pricing levels across segments. Models like cost-plus pricing and dynamic pricing based on demand and supply factors also aid pricing strategies. Optimal pricing enables financial service providers to expand the addressable market, increase profit margins and maintain competitive edge. Monitoring of pricing across asset classes and market participants along with open feedback forums allows companies to refine pricing approaches in line with Indian stock market dynamics.

5. External Insights and Forecasts

External Insights and Forecasts involves gathering information from outside sources to gain new perspectives. This includes Analyst Reports, Earning Calls, Articles, and Valuation Analysis. Integrating these external insights provides diverse viewpoints to supplement internal data and forecasts.

Analyst Reports

Analyst Reports refers to detailed documents published by financial analysts working for brokerage firms and investment banks. These reports provide in-depth analysis and recommendations on specific companies, industries, or markets. Analyst Reports help in company analysis by providing third-party insights into financial performance, industry trends, competitor landscape, and future growth prospects. For Indian stocks, Analyst Reports are obtained from brokerages such as ICICI Securities, HDFC Securities, Motilal Oswal, and Edelweiss among others.

Analysts develop financial models, conduct channel checks, interview management, and perform valuation analysis to produce their reports. Key sections of Analyst Reports include company description, financial analysis, valuation, upside/downside risk analysis, investment thesis, and buy/sell recommendations. Analyst Reports enrich company analysis with unbiased external perspectives on business strategy, financial health, and intrinsic value. India-focused investors leverage analyst reports to complement their own analysis and make prudent investment decisions.

Earning Calls

Earning Calls refers to quarterly teleconferences hosted by public companies to discuss financial results with investment analysts and shareholders. These calls help in company analysis by providing direct insights into management views on business performance, challenges, growth opportunities, and outlook. For Indian stocks, earning calls, transcripts and recordings are obtained from company investor relations pages, brokerage research portals, or financial news providers like Bloomberg and CNBC.

Earning calls involve formal presentations by the CEO, CFO and other senior executives on quarterly and annual financial statements. This is followed by a Q&A session where management addresses queries on strategy, operations, competition etc. Analysts assess management confidence, track record, and credibility during these interactions. Earning calls offer unfiltered information straight from the company leadership. India-focused investors should review earning calls to complement financial statements analysis with qualitative insights on business prospects, management commentary and future guidance. Earning calls often lead to stock price movements and help shape investor perceptions.

Articles

Articles refers to written content published in newspapers, magazines, journals, websites and other media outlets. Articles help in company analysis by providing additional insights, perspectives and commentary from third-party sources. For Indian stocks, relevant articles are found in business publications like Economic Times, Business Standard, LiveMint as well as international outlets like The Wall Street Journal, Forbes, and Bloomberg.

Articles enable investors to get an external viewpoint on companies beyond formal disclosures and reports. Business articles analyse industry trends, company strategies, new product launches, M&A deals, quarterly results, executive changes and other corporate developments. Opinion pieces offer commentary on management decisions, competitive moves, and growth prospects. Articles also include interviews of senior executives sharing vision and plans. Investors researching Indian stocks should supplement their analysis with well-researched and balanced articles from credible sources. Articles uncover new aspects of the business, provide colour on management thinking, and highlight risks or opportunities for a company. Articles serve as useful secondary data sources for developing a comprehensive perspective.

Valuation Analysis

Valuation Analysis refers to the process of estimating the intrinsic value of a company based on its fundamentals and growth prospects. Valuation analysis helps in company research by providing an analytical framework to determine whether the current stock price undervalued or overvalued the true worth of the business. For Indian stocks, valuation models are built using data from annual reports, investor presentations, and tools like CapIQ, Bloomberg, and Ticker Tape.

Valuation analysis involves financial modelling techniques like discounted cash flow, comparables, and residual income models. Key inputs include revenue growth, profit margins, capital structure, cost of capital, and performance benchmarks. The output is an estimated fair value per share, which is compared to the current trading price to make investment decisions. Valuation also establishes value drivers and allows sensitivity analysis. Investors analysing Indian stocks should conduct detailed valuation analysis to establish upside/downside potential and expected investment returns. No company analysis is complete without understanding what the business is intrinsically worth based on its financial and operating metrics. Valuation transforms theoretical insights into an actionable judgement of a stock’s attractiveness.

What is an example of company analysis?

To demonstrate company analysis, let’s analyse the Indian automaker Bajaj Auto Limited as an example. One important part of investing in stocks is analysing the underlying company. A thorough company analysis involves reviewing the core financial documents, financial performance metrics, strategic and operational factors, market and product analysis, and external insights and forecasts. For example, let’s analyse Bajaj Auto Limited, a major Indian two-wheeler and three-wheeler manufacturing company. 

First, we will look at Bajaj Auto’s core financial documents, such as the balance sheet, income statement, and cash flow statement. The balance sheet shows the company’s assets, liabilities, and shareholders’ equity at a point in time. Assets include things like cash, accounts receivable, inventory, and property. Liabilities include debt and accounts payable. Shareholders’ equity is the money invested by shareholders plus retained earnings. Reviewing Bajaj Auto’s balance sheet over time shows the company has grown assets and equity while maintaining a strong financial position with manageable debt levels.

The income statement shows revenue, expenses, and profit over a period of time. Bajaj Auto’s income statements demonstrate steady revenue growth over the past 5 years, increasing from Rs. 25,563 crores in FY 2018 to Rs. 31,188 crores in FY 2023. Net profit has also grown consistently, from Rs. 3,827 crores to Rs. 5,386 crores over the same period. This shows the company is generating more profits each year.

The cash flow statement shows how cash is moving in and out of the business through operations, investing, and financing. Bajaj Auto’s cash flow statements indicate the company is generating abundant cash from operations, driven by rising profits. This operational cash flow has largely funded capital expenditures and acquisitions, with excess cash going to pay dividends. The company’s strong cash generation gives it financial flexibility.

In addition to core financials, we will look at important financial performance metrics. Key metrics for Bajaj Auto include relatively high net profit margins (16-17%), return on invested capital (around 22-25%), and return on equity (over 20%). The company also has a strong current ratio (over 3.0) indicating it meets short-term obligations. These metrics indicate Bajaj Auto is quite profitable and financially healthy. 

This analysis of Bajaj Auto’s financial health, competitive position, and growth prospects paints an overall positive view of the company. While risks like competition and economic cycles exist, Bajaj Auto seems well-positioned to continue growing through its strong brands, distribution network, and financial flexibility. Of course, analysis should continue as new data becomes available. But conducting in-depth research across all these aspects provides a solid basis for making educated investment choices. Thorough company analysis is a key part of prudent stock market investing.

Where to find company analysis reports?

Strike is an all-in-one tool that will help you find company analysis reports in just a few clicks. Strike provides financial analysis, valuation, and peer comparisons for thousands of public companies. All the reports on Strike are easy to understand yet comprehensive. 

What are the methods of company analysis?

There are two main approaches to analysing companies for stock market investment – the top-down approach and the bottom-up approach. The top-down approach looks at the overall economic and market environment first, and then analyses industry sectors and finally individual companies. The bottom-up approach works in the opposite direction, starting from scrutinising individual companies first before considering the industry and broader economic factors. Both approaches have their advantages and disadvantages.

In the top-down approach, the analysis starts by assessing the overall economic environment, including factors like GDP growth, inflation, interest rates, fiscal and monetary policies. The aim is to identify the stage of the business cycle and predict broad economic trends. This provides the big picture context for stock investing. The next step is analysing different industry sectors to find ones that are likely to benefit from the economic backdrop. For example, certain sectors like consumer staples outperform in a recession, while technology could do better in an economic expansion. 

After identifying attractive sectors, the top-down approach moves on to selecting individual stocks within those industries. The assumption is that stocks in sectors poised to thrive will provide a tailwind that lifts the prospects of companies operating in that space. Analysts screen for stocks with characteristics like strong fundamentals, solid growth, reasonable valuations and sound management in sectors offering upside potential. The top-down view ensures selected stocks align with positive macroeconomic and sector trends.

The bottom-up approach works in the opposite direction. It starts from fundamental analysis of individual companies without initially considering industry and economic factors. The focus is on understanding each company’s business model, financials, competition, growth opportunities and valuation to identify strong stocks. Analysts look for companies with distinct competitive advantages, growing market share and revenues, healthy balance sheets, high returns on capital, robust cash flows, reasonable P/E ratios and solid management.

Who does company analysis?

Company analysis is primarily done by financial analysts. These analysts work for investment banks, wealth management firms, hedge funds, pension funds, and other institutional investors to provide in-depth research on public companies. Their role is to delve into a company’s financial statements, business model, industry trends, competitive landscape, management team, growth prospects, and valuation to gain a comprehensive understanding of the company’s performance, risks, and opportunities.  The analyst initiates coverage on a company by publishing a report announcing their opinion on whether investors should buy, sell or hold shares in the company. This recommendation is based on their analysis of the company’s operations, profitability, debt levels, cash flows, market share, and various financial ratios compared to industry peers and expectations. The analyst builds detailed financial models projecting future revenues, earnings, and other metrics. These models help determine whether the current stock price properly reflects the analyst’s view of the company’s intrinsic value.

Analysts stay up to date on companies through reviewing SEC filings, attending quarterly earnings calls, building relationships with management, and monitoring news. Their ongoing coverage of stocks ensures investment professionals and traders receive informed recommendations and targets as new developments unfold. Top analysts from elite firms are considered experts on the companies and sectors they cover given the depth of their research.

What are the limitations of company analysis?

The limitations of company analysis are that it relies heavily on past data, involves subjective estimations, lacks complete information, and has challenges predicting prospects.

One major limitation is that company analysis relies heavily on published financial statements and data. In some cases, these statements do not provide the full picture or even used to be manipulated by companies to appear more favourable. Investors must also make assumptions and estimates about future performance based on limited current data. As a result, the intrinsic value derived from analysis involves a great deal of subjectivity.

Additionally, company analysis is largely backward-looking. Financial statements reflect past performance rather than future expectations. So while analysis provides insight into how a company has been doing, there are no guarantees these trends will continue going forward. Market conditions, consumer preferences, and competitive forces are constantly evolving. Historical data has limited value for predicting future prospects.

The quality and depth of analysis is also constrained by the amount of information available. Some companies provide more transparency into operations and financials than others. Access to management teams or facility tours is limited as an outside investor. As a result, analysis misses key insights or makes inaccurate assumptions due to insufficient information. Private companies in India especially lack transparency compared to publicly listed firms.

Performing detailed analysis on each company is highly labour and time intensive. With thousands of listed stocks, it is challenging to conduct thorough bottoms-up analysis across the entire market. Investors rely on summaries or focus only on certain sectors, limiting the breadth of analysis. Retail investors with limited time and resources are at a disadvantage compared to institutional investors.

Is company analysis the same as fundamental analysis?

No, company analysis and fundamental analysis are not the same. While company analysis is a component of fundamental analysis, fundamental analysis encompasses a wider range of factors and analytical techniques. Fundamental analysis refers to the overall investment approach of evaluating securities based on underlying factors that affect a company’s actual business and financial performance. Fundamental analysts study everything that impacts the security’s value, including macroeconomic conditions, industry trends, and company-specific metrics. 

Arjun Remesh

Head of Content

Arjun is a seasoned stock market content expert with over 7 years of experience in stock market, technical & fundamental analysis. Since 2020, he has been a key contributor to Strike platform. Arjun is an active stock market investor with his in-depth stock market analysis knowledge. Arjun is also an certified stock market researcher from Indiacharts, mentored by Rohit Srivastava.

Shivam Gaba

Reviewer of Content

Shivam is a stock market content expert with CFTe certification. He is been trading from last 8 years in indian stock market. He has a vast knowledge in technical analysis, financial market education, product management, risk assessment, derivatives trading & market Research. He won Zerodha 60-Day Challenge thrice in a row. He is being mentored by Rohit Srivastava, Indiacharts.