Navigating Company and Industry Analysis | CFA Level I

As we embark on a new journey through the landscape of company and industry analysis, we’re here to equip you with a comprehensive framework for dissecting a company’s past and present performance, alongside its industry dynamics. This primer sets the stage for a deep dive into understanding business models, revenue drivers, and competitive positioning.

The Analysis Framework

Our exploration begins with a thorough examination of a company’s historical performance as a foundation. Key areas of focus include:

• Business Model Identification: Understanding the core of how a company operates.
• Revenue and Its Drivers: Diving into the sources of income and factors influencing revenue generation.
• Operating Profitability and Working Capital: Assessing operational efficiency and liquidity.
• Capital Structure and Investment Returns: Evaluating how a company is financed and its returns on investments.

This foundational analysis is complemented by an in-depth look at the industry landscape, competitive forces, and future performance forecasts, along with identifying potential risks and uncertainties.

Company Research Report: What to Include

An initial company research report serves as an exhaustive introduction to a company for analysts and investors alike, featuring:

• Front Matter: Includes issuer name, investment recommendations, target prices, and legal disclosures.
• Company’s Business Model and Strategy: A detailed narrative accompanied by charts and figures.
• Industry Overview and Competitive Positioning: Insights into industry size, growth, profitability, and an analysis using frameworks like Porter’s Five Forces and PESTLE.
• Financial Analysis and Forecasts: Focuses on revenue, costs, profitability, cash flows, and projected financial statements.
• Valuation Methodology: Explains how the company’s value or target price was estimated.
• Environmental, Social, and Governance (ESG) Factors: Discusses risks and their valuation impact.
• Risks Evaluation: A thorough discussion on potential downside and upside risks.

Subsequent reports may zoom in on specific updates or changes since the last coverage, adjusting recommendations based on new findings or shifts in the company’s operational landscape.

Determining the Business Model

To unravel a company’s business model, consider the following key elements:

• What products or services does the company offer?
• Who are the target customers, and what is their bargaining power?
• How does the company reach its customers, and through what sales channels?
• What are the pricing and payment terms?
• Who are the suppliers and key partners, and what is their bargaining power?

Understanding these components sheds light on how a company operates within its industry and its potential to generate returns on investments.

Gathering Information

Robust analysis is backed by information gathered from diverse sources:

• Company-Sourced: Regulatory filings, press releases, and company websites offer firsthand insights.
• Public Third-Party Sources: Industry reports, news outlets, and government statistics provide contextual industry understanding.
• Proprietary Third-Party Sources: Analyst reports and data platforms like Bloomberg enhance analysis with expert opinions and data.
• Primary Research: Surveys, interviews, and product studies conducted personally can fill in gaps left by secondary sources.

This introduction to company analysis is just the beginning. Stay tuned as we delve deeper into analyzing revenue and a company’s revenue drivers in our upcoming lessons.