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Business Fundamentals Analysis



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Welcome to this session on Business Fundamentals

If you see our stock investing rules, you will observe that most of them are framed based on the stock price or financial data related to the company.

As a Fundamental Analysis, we need to understand the business of a company and then identify its strengths and weaknesses.

The study that involves analysing the business performance of the company is called Business Fundamentals

This is a part of the activity that a Fundamental Analyst has to do in the course of identification of a company suitable for investing.

Areas of study in Business Fundamentals

Broadly speaking, there are five areas we need to study so as to understand Business Fundamentals of a Company

1. Finance and Accounting – It's All About Cash

2. Marketing – It's All About What the Customer Values

3. Strategic Planning - It's All About Being in the Right Market

4. Leadership – It's All About Having the Best Team

5. International Business – It's All About Understanding the Other Person's Culture

Questions to be answered to understand Business Fundamentals

Let us try to answer a list of questions that we need to answer to understand the Business Fundamentals of a company.

1 What does the company do?

2 Who are its promoters? What are their backgrounds? (also discussed as Rule #40: Invest in companies that are backed by good promoters and management)

3 What do they manufacture (in case it is a manufacturing company)?

4 How many plants do they have and where are they located?

5 Are they running the plant in full capacity?

6 What kind of raw material is required?

7 Who are the company's clients or end users?

8 Who are their competitors?

9 Who are the major shareholders of the company?

10 Do they plan to launch any new products?

11 Do they plan to expand to different countries?

12 What is the revenue mix? Which product sells the most?

13 Do they operate under a heavy regulatory environment?

14 Who are their bankers, auditors?

15 How many employees do they have? Does the company have labor issues?

16 What are the entry barriers for new participants to enter the industry?

17 Is the company manufacturing products that can be easily replicated in a country with cheap labor?

18 Does the company have too many subsidiaries?

Once you answered all these questions and decided that the company is well positioned to do business, you can invest in it.

Rule #20: Do a business fundamental analysis to understand the positioning and identify opportunities of the company

1. What does the company do?

A reading of the Annual Report of the Company or visiting the official website of the company will give us the vision and mission statement of the company.

Unfortunately, these statements of all companies will be very fancyful.

These statements may or may not reflect the reality.

Understanding the activities of the company is a very important part of fundamental analysis.

This is because, as investors, we put our money not just into something but into the business of the company.

By investing in the company, you become the shareholder of the company.

You will enjoy the profits (and suffer from losses of the company).

What are the future prospectus of the company?

In general, it is always better to study and invest in a business that you know rather than some unknown complex business that you will never understand.

Prepare a list of products and services that the company is into.

What is the demand and prospectus of the products and services in the near term and long term?

For example, Cigarette and Liquor / Spirit companies products will almost always have demand but the business prospects will be slim going forward because of the possible Governmental control and restriction of them.

12. What is the revenue mix and profit mix? Which product sells the most?

How much profits does each of them provide to the company.

Assignment

  • From the list of stocks that you are invested, do a Business Fundamentals Analysis and check if the company is a good one or not.
  • Identify some companies that have recently changed their business activities such as entering into another sector, stopping some product line etc.

Query: Closure of stores and its impact

XYZ Company has closed 3 of its retail stores. Is it good or bad?

To answer this and to make a meaningful decision as an investor, we need to determine why and which stores are closed by the company.

It is a company decision and companies take such decisions so as to improve their operational efficiency.

The reason for this might be reduced margin of business from those stores, or the company might be relocating the stores at a better optimal location.

The quantum of the impact would be less if the company has few thousands of stores because closure of 3 or few stores really do not make significant impact on the company turnover etc.

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