Guide to company analysis
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The following article is part of an ongoing educational series. The previous article can be found here.
When it comes to analysing a company, the good news is there are really only three major areas you need to consider:
1. The underlying business and industry,
2. The management,
3. The financials.
What can be less comforting is the news that there's no scientifically "correct" way to analyse these factors and, in the real world, there's not even a particular order of attack.
Despite the ads you'll come across claiming otherwise, there's no proven system that will help you to pick winning companies or winning stocks every time. And even the likes of Warren Buffett occasionally pick stocks that fail to outperform the market over a reasonable time frame.
It's not much consolation, but if a foolproof technique existed, everyone would use it and it would soon cease to be an advantage.
In fact, the closest you'll come to such a strategy is probably by picking stocks that are increasing their earnings and holding them for the long term - and even that's no gimme!
This is one of the reasons why the stockmarket is such a frustrating place for people who like nicely packaged answers to complex and chaotic problems.
Cause and effect are easily confused. Did a company's share price go up 20 cents in a day because the company made a positive announcement, as the newsreader may have you believe, or because of what it didn't say? Who can tell?
Because short-term market fluctuations rely on investor psychology as much as anything else, an infinite number of variables can render even the most detailed analysis off-beam.