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What is "company analysis"?

A company analysis is a review of a company as a whole.  This includes both the external environment of the company, which includes economic factors impacting the company, competitors, and customers in addition to the internal environment, which includes company financials, management, strategic objectives, and strength/weaknesses of the company.  This review may be a brief overview, which would include approximate 3 to 5 pages of analysis to an in-depth examination of the company which may be 20 to 50 pages of charts, graphs, and written analysis.  Regardless of the type of company analysis conducted, there are five main components that should be included in any company analysis.  The five components are industry, competitors, management, financials, and stock price if applicable.

Company Analysis: Industry.

In starting a company analysis, a researcher should always start with examining the exterior environment of the company, which includes competitors, industry, and stock prices.  The industry analysis should with identifying industry growth over the last several years.  Identifying the industry growth, researchers will be able compare the industry growth with the target company growth to determine whether the firm’s meeting or exceeding industry standards.  A great place to find this information is on IBIS.com or other data collection websites. A second component of the industry they should be assessed, in broad terms, would be the number of competitors entering or leaving the marketplace.  By examining competition, in a broad sense, researchers will be able to determine: whether the market is growing, difficulty of entering the market, and how competitive the market is in general. This information should be used as a foundation for your company analysis.  Further this will set the stage for an in-depth examination of the firm’s competitors.

Company Analysis: Competitors

Competitive analysis is probably the most important components of the external review.  This is because several management strategies are based on how competitors are reacting to customers.  In starting a competitive analysis, the researcher should identify the industry leader.  From this, an in-depth examination of the internal environments of the industry leader should be done.  This examination should be a review of management, product, service, and how customers perceive the industry leader.  Finally, the researchers showed assess how other competitors are reacting to the industry leader. Are other competitors mimicking the leader?  Are they offering differentiation with their products and services?  From this examination, a researcher may determine or identify market opportunities that may be exploited from new entrants.

Company Analysis: Stock Prices

Competitive analysis is probably the most important components of the external review.  This is because several management strategies are based on how competitors are reacting to customers.  In starting a competitive analysis, the researcher should identify the industry leader.  From this, an in-depth examination of the internal environments of the industry leader should be done.  This examination should be a review of management, product, service, and how customers perceive the industry leader.  Finally, the researchers showed assess how other competitors are reacting to the industry leader. Are other competitors mimicking the leader?  Are they offering differentiation with their products and services?  From this examination, a researcher may determine or identify market opportunities that may be exploited from new entrants.

company analysis
company analysis

Company Analysis: Management

Examining the management team of the company is a critical component of any company analysis because the management team are usually the main decision-makers.  From their decisions, the direction of the company is determined, how the company competes in the marketplace is made, and interrelations between various departments and even individuals are set by the lead from the management team. Because of all these important results, a thorough examination of the management team, starting with the CEO and Board of Directors ( yes, even the Board of Directors should be considered management due to their decision-making abilities) and ending with frontline managers.  From this review, the researcher should determine the effectiveness of management’s actions, such as cost, in relations to sales, and how various determined are managed.  A common department that is easily examined is Accounts Receivable.  For the most part, when accounts receivables days sales outstanding are growing, this shows that management is either struggling to collect funds or is using this tool as a loaner apparatus.  In the case of the latter, this may be an indicator that the company will soon be struggling with sales because of their need to offer incentives, which are increasing the collection time frame.

 

Company Analysis: Financials

 

A final component of a company analysis is the financials.  Now when I discuss financial, this includes the income statement, balance sheet, and cash flow statement, in addition to the various financial ratios such as profitability ratios, liquidity ratios, and debt ratios.  Through this analysis, researchers will be able to determine how a company is performing financially now, in the past, and from this possibly predict future profitability or losses for the firm.

 

Common ratios examined during a company analysis are the debt to equity ratio, current ratio, and net profit margin ratio.  The debt ratio compares how much the company has in debt with how much a firm has an equity.  A target debt to equity ratio for most companies is one.  This means that the company has just as much data as it does equity.  For companies with debt to equity ratios higher than one, this shows that the firm may be using excessive leverage, which increases the risk for the firm.  However, with companies that have a debt to equity ratio less than one, this usually means that the firm is conservative.  A benefit for conservative firms is that they may better weather contracting economies such as recessions.  However, conservative firms do not exploit market opportunities as well as companies that use debt.  This is often because companies with only equity financing have less resources available as compared to companies that use debt.

 

In summary, their multitude of reasons that a researcher will need to conduct the financial and company analysis.  When doing this analysis, make sure to touch on the five points of both to ensure a broad and comprehensive review.

 

Author of this business article: Paul Borosky MBA., ABD.

 

Owner of www.qualitybusinessplan.com, www.tutor4finance.com, and www.tutorwithpaul.com.

 

Analyze A Company

Company Analysis Tools:

  • Stock Valuation
  • WACC
  • Liquidity Ratios
  • Asset Management Ratios
  • Debt Management Ratios
  • Profitability Ratios
  • Market Value Ratios
  • Dupont Equation
  • Benchmarking
  • Market Multiple Analysis
  • Company Forecasting
  • Additional Funds Needed