Company Analysis 1: Qualitative Analysis

Company analysis

After a lot of discussions we are finally starting with the real analysis stuff, you were waiting for. As I have mentioned, I personally prefer the Bottom-Up approach over the Top-Down approach, I will start with company analysis first and then we will move on to industry and economy analysis. You may choose the Top-Down approach as well just the analysis sequence will change.

Analyzing a company is as complicated as you can make it. You can decide whether you want to complicate it or keep it simple. I personally like to keep it simple. 

Just imagine your friend (not the best one) wants to start a coffee shop and he is asking you for money in return for a partnership. What will you do? How will you decide, whether to fund his shop or not?

Let me help you, I will check if:

1. He is capable of managing a coffee shop/He has any prior experience of managing a coffee shop.
2. He is an honest person, who will not run with your money.
3. He is risking his own money as well.
4. The expected returns are worths risking the investment amount.
5. The coffee shops already operational around the location are earning well.
6. Your shop has some unique selling points that can grab customer attention.
7. People living around will keep spending money to buy coffee from a coffee shop.  

Do you agree with the checklist? 

Now, 

1. The first three points in the checklist consist of qualitative company analysis.
2. 4th point consists of a quantitative analysis of the company.
3. 5th & 6th point consists of industry analysis.
4. 7th point consists of economic analysis.

Investing in listed equities is very similar to investing in local businesses. While doing company analysis we give major importance to 

1. Quality of business and management. (Qualitative Company Analysis)
2. Quantity of money company can make against invested amount. (Quantitative Company Analysis)

Qualitative Company Analysis

The Qualitative Company Analysis consists of understanding the business, the management/promoter, promoter shareholding, ethics, and experience.

Understanding the business

Understanding the business of the company you are investing in is the first step of the analysis. If you don't understand how the comapany makes money, you will make a mistake while estimating the amount of money it can make and find yourself stuck in a dark zone where it will be hard to take any decision. Reading the annual reports, going through the company's website are few ways to understand the business. One should stick to the businesses he understands. 

Management Analysis

Management analysis consists of knowing the people running the company. Good management is one where the directors of the company: 

• Believe in ethical business practices. 
• Attend most of the company meetings. (It shows management dedication toward company)
• Keep their remunerations reasonable. (Reasonable does not mean low. It is subjective to the company's financial condition. If a company is going through tough times and still management is more interested in increasing their paycheck value that's a bad sign.) 

 All the data required for doing management analysis is available in the annual report of the company. 

Shareholding Pattern

Analysis of shareholding pattern consists of understanding the change in promoter holding. It has nothing to do with the promoter shareholding at any specific time. E.g. If you look at promoter shareholding in HDFC Ltd. it is zero but that does not make HDFC Ltd. a bad company as it is a professionally managed company, but if you find a company where promoter shareholding is dropping continuously or a lot of promoter shares are pledged you should be cautious while investing. Remember promoter is the person who knows the company better than anyone else and his actions of adding or reducing shareholding in the company speak louder than words.

These are a few major data points that require your attention while undertaking qualitative analysis. I hope you understood these points well if you have any doubt, please feel free to comment.

And don't forget to READ TO LEARN INVESTING.