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Equity Research Step-by-Step Checklist for Analysing Company Performance

  1. Fundamental Analysis
    1. fundamental analysis Tools and Skills for smart Investing
    2. What is compound interest in investment with examples
    3. Long term investment Tips for qualitative and quantitative analysis
    4. “Annual Report Explained Understanding Company Financials and Insights “
    5. Financial Statements Guide to Understanding Profit and Loss, Balance Sheets, and Cash Flow
    6. Understanding financial statements from two different angles
    7. Profit and Loss Statement How to understand Revenue Figures and Other Key Metrics for smart Investment Decisions
    8. Understanding Profit and Loss Statement Statement Profit before tax Net Profit after tax with examples
    9. Balance Sheet Definition and Examples
    10. liability Understanding 3 types of liabilities with examples
    11. Asset Understanding types of Assets in Balance Sheet
    12. Cash Flow Statement How to Read and Understand with examples
    13. Everything about Cash Flow Statement and Financial Statement
    14. Financial Ratio An analysis of the 4 types of ratios
    15. EBITDA understanding margin formula with examples
    16. Leverage Ratio 4 types of ratios and how to calculate with formula
    17. “Operating Ratio 7 types of ratios and how to calculate with the formula and examples “
    18. 3 valuation ratios Price to Sales (P/S), Price to Book Value (P/BV) and Price to Earnings (P/E) analysis with formula
    19. How to Pick a Share Basic Best Practices for New Investors with checklist
    20. Equity Research Guide to Evaluating Share Investment Potential with checklist
    21. Discounted Cash Flow technique The Key to Evaluating Share Prices and Maximizing Investment Returns
    22. DCF Analysis A Step-by-Step Guide to Valuing Shares like a Pro with examples
    23. NPV Net Present Value What does it mean with examples
    24. When to Sell a Share A Guide to Maximizing Profits and Protecting Your Portfolio
    25. Current Assets and Noncurrent Assets: What id the Difference with examples
    26. Return on Equity ROE What It Means and How to Calculate
    27. ROE, ROA, and ROCE How to calculate with examples
    28. asset turnover ratio Definition and Understanding the Impact
    29. Inventory Turnover Ratio What It Is, How It Works and how to calculate
    30. pe ratio Understanding Price Earning Ratio to Assess a Shares
    31. economic moat Advantage  in business
    32. Equity Research Step-by-Step Checklist for Analysing Company Performance
    33. Financial Health – Definition, Determinants, How to calculate
    34. Time Value of Money Understanding and Calculating Future and Present Value
    35. Sell Shares: Factors to Consider for Profit Booking
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Marketopedia / Fundamental Analysis / Equity Research Step-by-Step Checklist for Analysing Company Performance

Application of checklist

Stage 1 of the equity research process helps us gain an overview of the company by addressing questions about how, what, who, and why. It gives us a complete picture of the business. However, in the end, we must evaluate whether or not it is worth investing in; after all, attractive numbers are just as significant as a good outlook.

The aim of the second stage of equity research is to gain an understanding of the data and assess whether the firm’s activities and financial results are compatible. If not, it will fail to meet the criteria for an investible grade.

We now shall analyse the figures of Amara Raja Batteries by assessing each item on the checklist. Let us take a look at their P&L items – Gross Profit, Net Profit, and Earnings Per Share.

What is Revenue & Pat Growth

The initial sign of a business that could be suitable for investment is its expansion rate. To assess the expansion of the firm, we have to analyse both revenue and profit after-tax amounts. We shall assess progress from two points of view –

  1. With Year on Year, we can gauge the progress of the firm. Bear in mind; certain industries experience cyclical changes. With that said, a flat growth rate is to be expected at times. Nonetheless, it’s essential to monitor the competition and ascertain that stagnation is the norm across the sector.
  2. The Compounded Annual Growth Rate (CAGR) allows us to determine the organisation’s development and expansion over time, despite business cycles. Good, viable investments are typically the first to conquer alterations in economic cycles, manifesting themselves in a robust CAGR.

I like to invest in firms that have increased revenue and profit. This growth should be at least 15% on a compound annual growth rate.

 

The 5-year CAGR revenue and PAT (profit after tax) growth stood at 18.6% and 17.01%, respectively – a healthier pair of figures. However, we must examine the other metrics before concluding.

 

What are Earnings per Share (EPS)

Earning per share reflects the profitability of each stock. The rate of growth between EPS and PAT suggests that there is no extensive issuance of new shares beneficial to current shareholders. This is a mark of the management’s efficiency.

The 5-year earnings per share compounded annual growth rate for the financial year 14 is 1.90%.

 

How is Gross Profit margins calculated? 

Gross profit margins are expressed as a % and here’s how it is calculated: 

Gross Profits / Net Sales

And how do we calculate Gross Profits? 

It is Net Sales- Cost of Goods Sold

The cost of goods sold is the cost incurred in the production of the finished good. Previously, we went over calculating the inventory turnover ratio. Now, let us move on to evaluate how ARBL’s Gross Profit margins have changed over the years.

ARBL has exceeded the required GPM or Gross Profit Margin of 20%. This implies a few things; it suggests that their financial performance is sound, as well as their overall business strategy.

  1. ARBL holds a prominent position in the market structure. This could be attributed to the lack of rivalry in this sector, thus allowing only certain businesses to benefit from more significant profits.
  2. Operational efficiency reflects the capabilities of management, demonstrating how well they can run the business.

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