Company Analysis: Understanding a Company’s Financials and Business Model

Understanding a company’s business model is the cornerstone of strategic analysis. It’s akin to deciphering the blueprint of a house – it reveals the foundation, the structure, and the intended functionality. It helps businesses identify the key factors driving their financial performance and health. This blog will explore what is company analysis, different business models, and a variety of financials used by a business for making informed investments or strategic decisions. 

What is Company Analysis? 

Company analysis includes investigating a company’s financial health, business model, and competitive landscape to understand its strengths, weaknesses, opportunities, and threats (SWOT). This analysis helps you assess a company’s potential for growth, profitability, and overall investment viability.

While anyone can conduct some level of company analysis, financial analysts practise it extensively. These analysts work for various financial institutions like investment banks, wealth management firms, hedge funds, and pension funds. Their primary objective is to provide in-depth research on publicly traded companies to assist institutional investors in making informed investment decisions.

Types of Company Analysis

Company analysis is approached through various angles, offering a specific lens to understand a company’s health and potential. Here’s a breakdown of some common types of company analysis:

• Fundamental Analysis

It is the most traditional format of company analysis. It digs deep to understand a company’s true worth (intrinsic value) by examining its financial health (financial statements), how it operates (business model analysis), and its competition (competitive landscape).

• Technical Analysis

Technical analysis is all about price prediction. It studies historical stock price movements and technical indicators (like charts and moving averages) to forecast future price trends.

• Quantitative Analysis

Quantitative analysis uses numbers and statistical models to assess a company’s performance and future potential. It crunches financial ratios (e.g., P/E ratio, debt-to-equity ratio) and builds models (DCF) to determine a company’s health and predict its future potential, all based on complex numbers.

• Qualitative Analysis

The qualitative analysis looks beyond the numbers and assesses the company’s value, such as brand image, company culture, brand reputation, macroeconomic factors, management team, and the overall economic impact.

• Valuation Analysis

This analysis aims to estimate the fair market value of a company. The techniques include precedent transaction analysis, comparable companies analysis, and Discounted Cash Flow (DCF) Modeling. 

By combining these different types of analysis, investors and other stakeholders gain a well-rounded understanding of a company’s strengths, weaknesses, opportunities, and threats (SWOT). 

What Is a Business Model?

The next important question in a company analysis is: What is a business model?

The business model describes the core elements of how a company operates, creates value for its customers, and captures value in return. It’s essentially the blueprint that outlines how a business makes money. The company’s business model includes value proposition, target market, revenue streams, etc. 

Regularly analysing business and updating the business model is critical for established businesses to stay ahead of evolving trends and challenges. It also provides valuable insights for investors considering a company and employees seeking to understand the future of their potential workplace.

Types of Business Models

Businesses develop creative ways to generate revenue and create value for their customers. Here are some common types of business models:

Product-Based

Companies such as Nike, Microsoft, and Tesla directly sell customers physical goods or digital products. 

Service-Based

Businesses provide intangible services to customers. It includes consulting firms, cleaning services, hair salons, and legal services—for example, Netflix, Dollar Shave Club, and Adobe Creative Suite. 

Freemium

Companies offer a free basic version of their product or service, with premium features available for a fee—for example, Spotify, Dropbox, and LinkedIn. The Freemium model relies on a portion of users converting to paid subscriptions for premium features.

Advertising

Companies generate revenue by displaying targeted ads to their user base. Advertising fees from businesses looking to reach the company’s user base. For instance, Google, Facebook, BuzzFeed, etc.

Marketplace

Companies act as intermediaries, connecting buyers and sellers on a platform and taking a commission on each transaction—for instance, Amazon, eBay, and Airbnb.

Razor-Blade

Companies sell a low-cost initial product (razor) and generate recurring revenue from selling high-margin consumables (blades) needed to use the product—for example, Printers and ink cartridges, video game consoles and games.

Franchise

Companies grant licences to individuals or businesses to operate under their brand name and business model. Franchise fees and royalties on sales generated by the franchisee. For example, McDonald’s, Marriott hotels, Anytime Fitness, etc.

These are just a few examples, and many businesses employ hybrid models combining elements from several categories. 

Examples of Business Models

Let’s understand the business model using a real-life example: Spotify. The company uses a Freemium Music Model, which disrupts the industry. The company offers the world where you can access millions of songs whenever possible. Let’s understand its business model and how Spotify leverages it to thrive.

Spotify offers a two-tiered service:

Free Tier: Users can listen to millions of songs with shuffle play and limited skips mixed with occasional ads. It provides a taste of the vast music library and entices users to upgrade.

Premium Tier: For a monthly subscription fee, users enjoy ad-free listening, on-demand song selection, and the ability to download music for offline listening.

Spotify’s freemium model revolutionised music consumption. It challenged the traditional pay-per-song model and offered a more accessible way to enjoy music legally. This approach has challenges, as relying on ad revenue can limit profitability. However, Spotify continues to innovate, exploring new revenue streams like podcasts and finding ways to convert more free users to premium.

Conclusion

Decoding company analysis and business models is crucial for new and established companies. It acts as a roadmap to success, guiding how a company creates value for its customers, captures that value financially, and operates efficiently. Every company functions differently, opting for different business models. Every business model comes with a set of benefits and limitations. This knowledge equips them to make intelligent choices and navigate the ever-shifting business environment.

FAQs