Last Updated on May 13, 2021
To see the value of a company and understand its business in order to decide if you want to invest in it, you need to make a detailed analysis. In this article, you will learn the most important tips on how to analyze a company in 2021.
With these analyzes, you get the assurance that you have made the right decision. And if it happens that you have not made a good decision you can always look at your analyzes and see what you have misinterpreted.
Therefore, these analyzes are in any case good if you want to start learning how to choose stocks and invest in the stock market. Also, if you just want to learn more about a particular company or industry.
Read Most Recent Annual Reports 10K To Analyze a Company in 2021
The first thing you should do to analyze a company in 2021 is to read the annual report. This is the most important way for potential investors to understand a company’s financial business. It should be taken into account that the financial statements are also a sales element of the company itself that each company will try to make to look very good.
In the annual reports, you can find a business description, risks, legal lawsuits, financial data, and management records.
In a business description, you will find useful information about what the company does, who are their main customers, main segments, operations, and in which industry it operates.
Evaluate Management Team and Board Members
Since management makes major decisions it is very important to know what the team is like. If you invest in a stock, the people in management will make decisions with your money. If you can’t trust management and/or the board of directors, then maybe you should invest somewhere else.
You should see how long the director has held that position, as well as the rest of the members in management. Therefore, you want to see the long-term and stable management that has been in that company for many years.
Financial Statements Which You Will Find in Quarterly and Annual Reports
Although financial data accurately reflects previous events and results, it is impossible to predict exactly what will happen or how the company will behave.
You need to pay attention to the new technologies that are coming and the new ways in which various operations will be able to be performed which would make the observed company obsolete.
This is one of the reasons why investors often choose companies that are easy to understand. In this type of company, there are a lot of regular customers.
These are consumer product companies that don’t have to worry about consumers stopping buying their products in the near future. Examples of such companies are Procter & Gamble, Unilever, etc.
Investors spend much of their time on financial data in which they do various financial analyzes. With this, they get an impression of how the company has operated over the years. Also, the balance sheet and income statement should indicate if the business has become stronger or weaker over time.
Furthermore, cash flow is an essential indicator of a company’s earnings. He will show us whether the company is able to generate money or is its consumer. We need to pay attention to cash flow regardless of net income.
When you learn the most important things about a certain industry, you will be able to understand what the competition is like. In this section, it is easily possible that you will notice how the competition is better than the target company. As a result, you can redirect further analysis to that company.
It is important to take a good look at a competitive company to see what trends and opportunities they have been able to predict and how well they will react to them.
They may have new products that will reduce the target company’s margin. In any case, it is necessary to analyze the competition to see what kind of competitive industry the desired company is in.
Additionally, what we can do in the competitive analysis is to compare the financial ratios of the target company with the competition. This will give us a good impression of how prices and ratios are moving in that industry.
Determine Fair Value (DCF, P/E, EBITDA) To Analyze a Company in 2021
There are several ways we can analyze the fair value of the company to find out the value of a stock. It is important to remember that stocks are constantly driven by the emotions of investors who buy and sell stocks without any pattern. In any case, an investor should never overpay a stock.
To do this, we need to analyze the fair value of the stock using one of the methods. You can do this via DCF calculation, P/E, EBITDA, or similar.
Discounted Cash Flow (DCF) is a valuation method used to estimate the value of an investment based on its expected future cash flows.
Price to earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings.
Earnings before interest, tax, depreciation, and amortization (EBITDA) to enterprise value (EV) is the ratio that measures a company’s return on investment (ROI).
Look at Year to Year Differences, From Company to Company
Most often, the best comparisons are when we look for several years in a row. Then we can see if the company has fulfilled its promises to do what it said in previous years.
When analyzing a fast-growing stock, it is very likely that such a company will slow down the pace. Therefore, it grows less after a while.
As a result, there is a change in strategy, which can significantly change the company’s valuation. Watching your profit margin can help you with this.
In the case the company stops doing so well, will fall. This could be a sign that new competition has entered the market or some technological change has taken place.
Any investor who wants to start investing individually in stocks should devote a lot of time to learning. The most important things that should be in focus are:
- Reading annual reports
- Evaluate management
- Understanding financial statements
- Doing analysis of financial statements
- Doing an analysis of competition
- Looking at consistency of company
After doing these steps you will have some basis to make a decision. Of course, this will not take minutes or few hours. The first analyzes can take several weeks or even months. But each subsequent analysis will be easier and simpler.
The problem with many people is that they spend more time when buying other things like home appliances than when buying stocks.
While the ratio of money invested in stocks is 10 to 100 times higher than money invested in household appliances. If we look at such a ratio we need to invest 10 to 100 times more time in learning about the investment we want to make.
Let’s fix our priorities in life.