What to Look At When Analyzing a Company

Company analysis is one of the most challenging things to perform. There are no universally right or wrong procedures.

Worse, the market will not necessarily help in the short run, even if you are right about a company’s cheapness.

So what can we say about the parameters to look for when analyzing? The best approach is to go from the general to the particular.

The Context of the Company

All businesses have a context. An industry, a country in which they operate, etc. Without understanding the aspects that surround the company, no analysis is complete.

First, start with the country. Is it growing? Is it a country that provides security? Many companies can be serious but unfortunately operate in countries that won’t help them develop.

The same happens with industries. No matter how efficient a company is if the sector in which the company does business is slowly disappearing.

For example, a coal-burning company might be ok today, but we know it probably won’t be operating in a century.

This does not mean you can’t make money with these companies. However, you must be aware of these details.

The Long Term: What Makes it unique

Only the most efficient and innovative will prevail in the long run. Efficiency means not only lower costs compared with income. It’s also the capacity of a company to adapt to different situations.

Measuring innovation and efficiency is difficult. Warren Buffett, one of the most famous investors on the planet, mentions the concept of “moats.”

Moats refers to a business’s ability to maintain competitive advantages over its competitors, thus protecting its long-term profits and market share.

The best competitive advantages are those created by innovation, creating something unique and of value which is the key to maintaining market share and client fidelity in the long run.

For example, this is the reason behind Apple‘s tremendous success and what made it the biggest company in all markets.

Ratios and Situational Opportunities

One last thing to remember is the possibility of finding opportunities based on ratios.

Investors often observe ratios like price-to-earnings or price-to-sales to determine whether a company is cheap.

If a company has a lower price-to-earnings ratio than its industry peers, it might be time to ask why. If nothing is wrong in its context, it might be an opportunity.

The same happens with other ratios. Investors search for opportunities based on financial statements, growth prospects, and current prices.

Fundamental analysts try to find value in undervalued companies by combining all the aspects reviewed in this article.

The value approach is combined with technical analysis to find the best moment to enter a position.

Finally, you should also bear in mind that these parameters are dynamic. A ratio fluctuates daily, so don’t forget to check if things change over time. One financial statement can change your complete ratio analysis.