When analysing any stock investment opportunity, a good starting point is to create company profile by listing down some basic details about the company. Try to make all of this in one page. You should look at all these things in detail as you go on, but for now the idea is to imprint this one-page company profile in your mind. The purpose of creating a company profile is just to help you recall what the company does, and not whether it is a good or bad investment.
Remember: Creating a company profile is just the beginning of equity research, not the end
(2) What products does it make or what services does it offer?
(3) What are the main sources of revenue? Try putting it in percentage terms for:
► Sale of products or services
► Other income
► Geographies where those sales are made
(4) What are the main items of expenditure? Try putting it in percentage terms for:
► Salaries or labour costs
► Raw material costs
► Advertising and other administrative expenses etc
(5) Who are the key competitors of the Company? – list both direct and indirect competition.
(6) Key Risks – Just look for what is the business dependant upon?
– Impact of economic growth? growth in other sectors? changes in government policies or regulations?
(7) Is the business cyclical or seasonal in nature?
Note: Do not think of this as an analysis
There are many beautiful companies and businesses which will get an A+ grade if you treat the company profile sheet as analysis. It is not necessary that they make good investment opportunities. For that, you will have to test many other things, primarily – Price of the share, i.e. is it available cheap or is it too expensive? You will look at this as you go on.
Integrity of Management
The next section discusses issues of corporate governance such as management integrity and competence. However even before you create company profile, do find out a little about those who are in charge of running the company – the management, the directors and the promoters. If you suspect them of lacking integrity based on past events or otherwise, just stop right here. No matter how great the business is, you will not make money if you partner with those who are not honest.
► Name the key management, directors, and the promoters of the company.
► Is the management honest?
► Are they competent, skilled, well-connected (i.e. do they have what it takes to run the business?)
► Are their plans and promises rational – look for what they say in the annual reports or elsewhere – press or TV interviews – are the promises rational, achievable? Or are they over ambitious or simply absurd (believe me – the last category of promises do exist).
► Have they been making efforts to fulfil their promises? Check for updates on past promises in annual report. Have previous plans been abandoned?
► How has the management utilised its cash in past? Does it distribute it out as dividend or put it in reserve?
► Is the management being compensated more than the industry standard – check if they stock option plans and at what price do they get it – are these plans discounted and disclosed?
About the Author
Rajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.Follow @SanaSecurities