Financial Management: Week 45

Equity Analyst Approach on Evaluating a Company

Learn
An equity analyst approach to evaluating a company involves both qualitative and quantitative analysis. In qualitative analysis the analyst would look into more subjective qualities of a company such as management, business model, industry analysis and brand name. In quantitative analysis the analyst would crunch numbers (financial ratios) and predict cash flows to find the worth of a company or its intrinsic value, a fancy term for what we believe a stock is really worth as opposed to the value at which it is being traded in the marketplace.

Unlearn
I realized that equity analyst do not focus only on financial measure. In fact, more importantly, they do evaluate qualitative factor such as management, business model, industry analysis and brand name.

Relearn
Strong management would be the backbone of any successful company. The management ultimately would be the people making the strategic decisions and therefore serves as a crucial factor determining the fate of the company. To assess the strength of management, analyst asks the standard five Ws: who, where, what, when and why?

The second factor equity analyst would need to know is what the company does and how it makes money. In other words they need to determine the company’s business model. If a company goal is to make money, the competitive strategy is the battle plan for achieving that goal.

Thirdly, a valuable brand reflects years of product development and marketing. Having a portfolio of brands diversifies risk because a good performance of one brand can compensate for the underperformers. Analyst would steer clear of any company that is branded around one individual. This is because any bad news regarding that individual may affect the company’s share performance even if the news has nothing to do with the company operations.