Company analysis for investment decision

What is company analysis?

Company analysis is a part of the fundamental analysis of the stocks. Under company analysis, an investor collects and evaluates the company’s financials, its track record, products, goals, missions, profitability, growth, etc. It helps investors while making the decisions for stock investment. Company analysis requires the careful examination of the company’s quantitative and qualitative fundamentals.

Company analysis

Qualitative and quantitative fundamentals

Sources and uses of funds: Sources and uses of funds in an organization can be traced with the help of fund flow analysis. One of the major uses of the fund flow analysis is to find out whether the entity has used a short-term source of funds to finance long-term investments. Such methods of financing increasing the risk of a liquidity crunch as the long-term investment may not generate enough surplus in time to meet the short-term liabilities.

Growth record: The growth in net income, net capital employed, sales and earning per share of the company in the past few years should be examined. For this purpose, the following growth indicators may be helpful: Percentage growth rate of Earnings per annum, Price Earning Ratio, Percentage growth rate of Netblock.

Net worth: Networth is the sum of all assets (financial and nonfinancial) owned by an organization as reduced by the sum of outsider’s liabilities. The total net worth divided by a total number of shares is known as the book value of shares. It can be said that a company has a good financial health if there is a consistent growth in its network. A consistent growth in net worth reflects that the assets are growing faster than debts.

Financial statement analysis: Financial statements analysis for the past few years would help an investor in understanding the financial solvency and liquidity, the efficiency with which the funds are used, the profitability, the operating efficiency and the financial and operating leverages of the company.

Quality of management: Though it is the intangible factor, it has a very important bearing on the value of the shares. The investor always gives a close look at the management of the company in whose shares he is going to invest. Quality of management has to be seen with reference to the experience, skills, and integrity of the persons at the controls of affairs of the company.

Cross-sectional analysis: It can be done by examining the financial statements of the two comparable firms against some benchmark figures for its industry and to analyze the performance of the firm over the time. Common-sized financial statement and financial ratio analysis can be helpful for cross-sectional analysis.

Marketability of the shares: It is the most important factors to be considered by the investment managers. There are many listed shares in stock exchanges that remain inactive for long periods with no transactions being executed. To purchase and sell such stocks is a difficult task.

Location of the entity: the location of the company’s manufacturing facilities determines its economic viability which depends on the availability of the crucial inputs like power, skilled labor and raw materials, etc. Nearest to markets is also a considerable factor.