Ways to analyze a company

"If you spend too much time thinking about a thing, you will never get it done." - Bruce Lee



4/21/20232 min read

There are a lot of different ways to analyze a company as follows:

  1. Valuation based on assets and liabilities.

  2. Valuations based on earnings.

  3. Valuations based on cash flows.

  4. Technically using charts for price, volume and other indicators.

When I started investing I used to do it without understanding the difference between price and value. As Warren Buffett says “Price is what you pay, value is what you get”. He learnt this from his mentor/teacher called Benjamin Graham. Benjamin Graham has written 2 good books on investing called “The Intelligent Investor” and “Security Analysis”. What he observed during investing was there are times when prices of some companies are so depressed that the whole company is selling for a price which is less than the value of its assets. For. e.g. If you know that a cupboard has Rs.100,000 inside it but the owner is selling the cupboard to you for Rs.50,000. Would you buy it? The answer is obviously yes. Benjamin Graham specialized in finding such bargains and taught the same technique to Warren Buffett, Walter Schloss and many others who carried on the practice and began to be called value investors.

As time passed these bargains became hard to find and the portfolio had to be churned every few years to find new opportunities for investments as the price rose to reflect the underlying values. At this time there was another investor called Philip Fisher who wrote the book “Common Stocks Uncommon Profits” in which he explained that there are some companies which are so good that keep growing year on year and there is no reason to sell them. You can buy and hold them forever. These companies keep growing their earnings and the price keeps following. The price that is paid for such companies becomes immaterial over the long term as the stock earnings and price keeps compounding.

Another approach is the P/E vs Growth approach to investing which was made famous by Peter Lynch in his books “One Up on Wall Street” and “Beating the Street”. He basically says that if a stock is growing at 10 per cent the market will give it a P/E of around 10. If it is growing at 20 per cent the market will give it a P/E of 20 and so on. According to this, if P/E is less than growth the stock is a bargain and if P/E is greater than growth the stock is overpriced.

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