How to Analyze a Company – 5 Simple Steps for Financial Analysis
- The Framework: Overview of the 5 Simple Steps for Financial Analysis
- Company analysis
- Step #1: Analysis of financial health & stability
- Step #2: Profitability analysis
- Step #3: Growth analysis
- Step 4#: Stock analysis
- Step #5: Environmental analysis
- Preparing you to get ready for financial analysis
- Final Thoughts on the Simple, 5 Step Framework for Financial Analysis
Do you think company analysis is difficult? Aren’t you sure which steps to follow for a proper financial analysis? And you are struggling to find a simple and practical guide to help you?
To be honest, there is no magic around company and financial analysis. Even better, there is quite an easy framework you can always use. No matter if the company is small, big, international, manufacturing cars, providing professional services, or doing anything else.
In this article, I will introduce to you the most straight-forward guide for financial analysis. I will give you an overview of the steps you should follow. Doing so, you have clear guidance to easily analyze any company you wish.
So here it is: a simple but still in-depth framework with 5 steps for a proper financial analysis.
The Framework: Overview of the 5 Simple Steps for Financial Analysis
Image, company or and financial analysis is just as easy as doing a house visit. It is kind of a small walk through a house where you stop here and there. Specifically, you stop 5 times, where you analyze some easy financial ratios in a very logical order.
It takes you only 5 steps to get from the ground floor to the house’s roof terrace. Only 5 simple steps from analyzing a company’s financial foundation to evaluating its environment – in only one framework.
Let’s start our visit and look at the framework for financial analysis from the outside. Overall, there are 5 levels we have to master to complete our visit and be able to enjoy the sun from the house’s roof terrace. These levels are the following:
- Analysis of Financial Health & Stability
- Profitability Analysis
- Growth Analysis
- Stock Analysis
- Environmental Analysis
Let’s take a closer look at the framework. We see that the first 3 and most simple steps for financial analysis can further be grouped into a broader category: company analysis. Besides, there are the fourth and fifth standalone steps: stock analysis and environmental analysis. In the following, I will explain the individual steps in more detail:
First, we are looking at the company itself. Of course, we want to know if it is in a good shape and is a good investment opportunity.
Overall, we follow the school of thought of the most prominent value investors Benjamin Graham and Warren Buffet. We are focusing on classical fundamental analysis and fundamental data. Usually, this data is available on a company’s financial statements. Fundamental data can be manifold. However, it always tells you something about the most deep-rooted performance characteristics of a company.
Besides its importance, fundamental data is usually easy to get and very straight-forward to analyze. That’s why we are focusing on it as a first step of our simple financial analysis. Nevertheless, you have to be aware of the major pitfalls when doing the analysis.
The company analysis is further split into the following three steps:
Step #1: Analysis of financial health & stability
Step #2: Profitability analysis
Step #3: Growth analysis
Now you are wondering why we are using exactly this sequence and do not, for example, start with profitability analysis?
Quite some thoughts went into the design of this very simple, but still profound framework for financial analysis. And here is why we go along this chronological order.
Overall, everyone’s time is scarce and valuable. Thus, you do not want to do unnecessary work. That’s why we start with analyzing a company’s financial health and stability. We have to make sure the company has a solid financial foundation such that it makes sense to go ahead with the analysis. If we see that the company’s financial foundation is rather uncertain and unstable, we might just leave the company for now and look for another investment opportunity.
Now that we are sure the company is in a solid position, we are looking at its profitability. Profitability tells us how good the company is in transforming the money from outside investors into returns. Of course, we investors are interested in the highest possible return in relation to our money invested. That’s why profitability is the second step.
Finally, we are looking at the company’s growth. Growth is vital, especially if you are looking for a long-term value investment. If the company’s growth has been sustainable, it is a good indicator that it will continue to be. Yet, growth is only one of many factors that impacts profitability. Thus, growth is only the third, but still one of the first and most simple steps in our approach for financial analysis.
Do you want to know more about company analysis? Click here to see the related article and follow the easy, step-by-step guide that tells you how to apply and interpret the different financial ratios.
Step 4#: Stock analysis
The fourth step for financial analysis, which is stock analysis, is quite simple again.
By now, you as the potential investor know if the company is a good shape, profitable, and growing. Next, you want to know if it delivers the level of return you expect and require. Additionally, you want to make sure the stocks are not overvalued such that you would pay too much.
Thus, we are looking at different stock metrics. Thereby, we can analyze the stock from many different angles and regarding a variety of criteria. Most of these stock metrics have also been used by Graham and Buffet for many decades.
Again, if you want to know more about stock analysis, click here! The detailed article tells you which financial ratios to apply and how to interpret their results.
Step #5: Environmental analysis
The fifth step is the environmental analysis. An environmental analysis can be comprised of a variety of different factors. In our case, we just want to make sure we do not overlook some crucial aspects in the company’s environment that we should be aware of when making a final investment decision. The environmental analysis concludes the overall financial analysis.
Do you want to dig deeper into the environmental analysis? Then click here to see the related article. It will tell you which aspects to analyze and where to pay attention to.
Preparing you to get ready for financial analysis
Decide and be clear on which company you want to analyze
This may sound trivial. However, you have to be really sure which company you want to analyze and how it’s called and spelled. Otherwise, you might do a lot of work in vain.
For example, there is “Fresenius”, a German health care company, as well as “Fresenius Medical Care”, producing medical supplies. Yet, both companies are listed in the DAX. As you can see, there might be a misconception about the exact company is you do not specify the one you actually mean.
Get the company’s financial data
You’re interested in long-term and high dividend stock investments, right? Thus, you primarily care about solid fundamental data providing a decent yield. To find the best companies that fulfill these criteria, we look for suitable, listed companies globally.
Of course, the companies you want to analyze are fully up to you. Though, the good thing about listed companies is that they are obligated to publish their quarterly and annual results.
To follow the framework and perform the simple steps for financial analysis you need a company’s most basic financial statements. Ideally, you get them for the past 10 or more years. But, if they are not available for such a long time, still make sure to get the longest possible timeframe. Most often, the financial statements are published on a company’s website in the investor relations section.
For example, here you can find Apple’s dedicated investor relations website. It contains a variety of different information. This is, amongst others, its annual reports, quarterly results, proxy statements, 10-K forms, SEC filings, stock price information, etc.
In addition to the company’s financial statements you need some more, stock related information. You can get that from different sources. For example, from the respective stock exchange the company is listed or from a general stock data information provider. For Apple, stock related information could be found at NASDAQ or Yahoo Finance.
Here is an overview of the required information to perform the 5 simple steps for financial analysis:
Statement of Cash Flows
Stock price information, such as (historical and) recent share prices, dividend payout, etc.
Final Thoughts on the Simple, 5 Step Framework for Financial Analysis
I admit, analyzing a company is not easy. However, now you have a very easy, straight-forward but still in-depth guide for company analysis.
Always remember: there is no magic behind financial analysis. You only have to stick to the process and do the 5 simple steps for financial analysis after each other.
Now it’s up to you: let’s apply the framework and do some financial analysis.
Let me know with which company you’ll start off and leave a comment below right now.
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