Company Analysis: Past and Present

This section discusses the issuer's business model and strategy, including details about the products or services offered, key customer groups, and operational strategies.

This includes analysis of the industry size, growth rate, key drivers, market share trends, and profitability. It also covers competitive analysis using tools like Porter's Five Forces and evaluates the company's strategic positioning within the industry.

This section evaluates key drivers of revenue, costs, profitability, cash flows, and the issuer’s uses and sources of capital. It includes both historical data and forecasts, supported by financial statement models.

Provides estimates of company and security values, discusses the methodologies used such as relative and present value approaches, and includes scenario and sensitivity analyses.

Evaluates material downside and upside risks and discusses how these risks are considered in the financial analysis and valuation.

Assesses ESG indicators and risks, discusses the ownership structure, management composition, and executive compensation.

A business model includes products or services offered, target customers, sales channels, pricing strategies, and essential resources and relationships. These elements help in understanding how a company operates and generates revenue.

Analysts explore several key questions such as what the company sells, to whom it sells, how it reaches and delivers to customers, how pricing and payments are structured, and what resources and relationships are crucial. These questions guide the detailed analysis of a company's business model.

Analysts utilize various sources to gather information about a company's business model. These include issuer sources like regulatory filings and earnings calls, public third-party sources like industry reports, and proprietary sources like analyst reports and data platforms.

Practical examples, such as the case study of Warehouse Club Inc., demonstrate how analysts apply the framework of determining a business model by answering key questions and identifying areas for further research.

Revenue drivers are factors that directly influence the level and changes in revenue. These can include sales volume, price, market share, and economic indicators like GDP growth. Understanding these drivers helps in forecasting and analyzing a company's financial performance.

This approach decomposes a company's revenue into specific drivers such as sales volume per store or membership fees, providing a detailed view of the sources of revenue and their changes over time.

Top-down analysis views a company's revenue in the context of larger economic factors, such as total market size and the company's share of that market. This approach helps in understanding a company's performance relative to the broader market.

Pricing power is the ability of a company to increase prices without losing customers to competitors. It is influenced by factors like market structure, competition, product differentiation, and customer loyalty. Companies with high pricing power can maintain or increase profit margins over time.

Operating costs can be classified based on their behavior with output (fixed and variable), their nature, or their function. Fixed costs do not vary with output, while variable costs do. This classification helps in understanding the stability and predictability of operating profit.

Under IFRS and US GAAP, operating costs must be disclosed either by their natural classification (what the cost is) or functional classification (the purpose of the cost). This affects the presentation of income statements and the calculation of key profitability measures like Gross Profit, EBITDA, and EBIT.

Working capital management is crucial for a company's financial health. Key measures include the cash conversion cycle and the ratio of net working capital to sales. These metrics help assess how efficiently a company manages its short-term assets and liabilities.

Companies utilize capital from debt and equity investors to generate returns that exceed the required rates of return. Analyzing the sources (e.g., cash flows from operations, debt issuance) and uses (e.g., capital expenditures, dividends) of capital helps in understanding how effectively a company is managing its financial resources.

This involves assessing the returns on invested capital over time compared to the required rates of return to determine if management has effectively used the capital to create value. Tools like IRR and NPV are used, though analysts often rely on more aggregated measures due to limited access to detailed project data.

The risks associated with a company's capital structure can be evaluated using leverage and coverage ratios, credit ratings, and the degree of financial leverage, which measures the sensitivity of net income to changes in operating income.

Financial leverage refers to the use of debt in a company's capital structure. Higher financial leverage indicates a greater use of debt relative to equity, which can amplify returns but also increases risk.