Past, Present, and Future - A Guide to Creating Comprehensive Equity Research Reports
A company research report is a comprehensive document that helps investors make informed decisions by analyzing a company's business model, financial health, and market position. These reports synthesize vast amounts of information into a clear investment recommendation.
Effective company analysis follows a structured, three-tiered approach to build a complete picture of the company.
Analyze the business model, historical revenue drivers, profitability, and capital structure.
Understand industry dynamics, the company's competitive position, and its growth prospects.
Forecast future profitability, investment needs, and potential risks based on the first two tiers of analysis.
Understanding a company's revenue drivers is crucial for forecasting. Analysts typically use a combination of two approaches:
This approach starts with macroeconomic and industry-level data, such as total market size and the company's market share, to forecast revenue.
This approach focuses on the company-specific drivers, such as sales volume by product line, pricing, and distribution channels, to build a detailed revenue forecast.
Operating costs can be classified by their behavior (fixed vs. variable) or by their function (e.g., cost of goods sold, SG&A). Understanding this cost structure is key to analyzing profitability.
Revenue - Cost of Sales
Earnings Before Interest, Taxes, Depreciation, and Amortization
EBITDA - Depreciation & Amortization
The Degree of Operating Leverage measures how a company's operating income changes in response to a change in sales. A higher DOL means that profits are more sensitive to changes in sales, which amplifies both gains and losses.
Analysts must assess how effectively a company uses its capital and manages its debt.
Assess whether the returns on the company's investments (using metrics like IRR and NPV) are meeting or exceeding investor expectations.
Analyze leverage and coverage ratios to assess the company's debt burden and its ability to meet its obligations. The Degree of Financial Leverage (DFL) measures the sensitivity of net income to changes in operating income.
Return on Equity (ROE) is a key measure of profitability. Decomposing it helps to identify the drivers of a company's performance.
How much profit the company makes from its revenue.
How effectively the company uses its assets to generate sales.
How much the company relies on debt to finance its assets.