Si quieres learn to invest in the stock market It is essential to understand and master the valuation of stocks, which implies mastering the valuation of companies. To help you, in this episode of Value Investing FM we will explain how to value a company in practice step by step. To do this, we will analyze the 15 main steps that any company analysis and valuation checklist should contain with questions that we must ask ourselves and examples in each of the steps.
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- competitive advantages analysis It is essential in any analysis and assessment process:
- Intangible assets? Exchange cost? Network effect? Cost advantage? Efficient scale?
- Can the product be manufactured or the service performed cheaper in another country providing the same value?
- Does the company have pricing power?
- Are they solid or have they deteriorated?
Management Team Analysis
El management team analysis It is a factor to which we increasingly give more importance when evaluating companies:
- Are managers focused on creating long-term shareholder value?
- Have they allocated the capital correctly? (Investments, acquisitions, dividends, share buybacks ...)
- What is the salary and compensation method of the board of directors?
- Is there any factor that could make us doubt the capacity, honesty or alignment with the shareholders of the management team?
The relationship of the company with its employees can be a crucial factor in many cases:
- What type of employees does the company have?
- What is the productivity per employee and how has it evolved?
- Is there an environment of labor conflict in the company?
- What power do employees have in the company?
Shareholder analysis is also an essential step, although it is sometimes overlooked:
- How many types of shares are there? What is the difference between them?
- How has the number of outstanding shares evolved?
- Who are its shareholders?
- What is the participation of the board of directors in the company? What percentage do the shares represent in your equity?
- Are they buying or selling stocks?
Análisis del Entorno
Businesses are not isolated from the world. For that reason, we have to analyze the entire environment of the company, including:
- Political, Regulatory and Legal Environment: How does the legislation affect the company?
- Economic Environment: How is the company affected by economic factors? (GDP, unemployment)
- Sociocultural Environment: Can the company adapt to other cultures, values, languages or lifestyles?
- Technological Environment: How can future technological changes affect the company?
- Demographic Environment: What are the demographic trends in those countries? (Population, age, growth, sex, origin)
- Ecological-Environmental Environment: Can it cause an environmental problem?
Financial analysis is an essential step in any business valuation. We can divide it into 3 steps:
- Accounting and auditing
- Does anything make us suspect that the company may manipulate your accounts?
- What is the auditing company?
- What accounting criteria do you use?
- Does the company continually change auditors? Why does she do this?
- Financial Health
- Liquidity (Current Ratio and Quick Ratio)
- Solvency (Indebtedness and Interest Coverage)
- Profitability and Efficiency
- Income Statement, Cash Flows and Balance Sheet (Evolution of the main metrics)
- Evolution of the main non-financial metrics. (Eg. Product sales by units)
- Margins (Gross, operating and net)
- Cash Conversion Cycle
- Profitability: ROA, ROE (Du Pont Analysis) and ROCE
Within the risk analysis and management, we must include financial risk and business risk. Among other questions, we must ask the following:
- For what reasons can I lose money?
- What are the chances of being wrong?
- What if I am wrong?
- What profitability do I demand taking into account the characteristics of the company?
To analyze growth in a business analysis, it is not only necessary to analyze the past, but also the ways that the business can grow in the future:
- How has the company grown in recent years? (Sales, costs, profits, cash flows, book value ...)
- How will it grow in the future?
- territorial expansion
- Sell more products or services than the current ones
- Increase prices
- New business areas
- Repurchase of shares
The last step when valuing a company is the calculation of the intrinsic value:
- What valuation method should be used in this case?
- Scenario analysis
- Does the company have any possible catalysts?
- Does the company have positive or negative options?
- If the company is undervalued. Why is the market pessimistic? Is there something the market doesn't understand or can't handle?
Recommended links on business analysis and valuation
- Free Introduction to Stock Market Investing Course
- Competitive advantages
- The Management Team: How to Analyze It, Top 3 and Recommended Books
- How to Manage Risk When Investing in the Stock Market