Learning Module 5
Company Analysis: Past and Present
Key Outcomes Summary & Practice Problems
What you must be able to do
Curriculum Year: 2026
Describe the elements that should be covered in a thorough company research report.
Determine a company's business model.
Evaluate a company's revenue and revenue drivers, including pricing power.
Evaluate a company's operating profitability and working capital using key measures.
Evaluate a company's capital investments and capital structure.
1 · Company Research Reports
Analysts present their company and industry analysis, valuation, and investment recommendation in a company research report. The structure depends on the analyst's setting (sell-side vs. internal) and whether it is an initiation or subsequent report.
Front matter: Issuer name, symbol, recommendation, target price, disclosures.
Recommendation: Summary of key reasons.
Company description: Business model, strategy, revenue/profit breakdowns.
Industry overview & competitive positioning: Porter's Five Forces, PESTLE, market share trends.
Financial analysis & model: Key drivers, forecasts, historical financials.
Valuation: Relative and present value approaches, scenario/sensitivity analysis.
ESG considerations: Governance, management, compensation.
Risks: Material downside and upside risks.
Shorter; for audiences already familiar with the issuer.
Front matter: Names, issuer, symbol, current price, target price, disclosures.
Recommendation: Summary of changes and support.
Analysis of new information: Quarterly results vs. expectations, changes to forecasts.
Valuation: Updated estimates.
Risks: Updated risk factors.
Company and Industry Analysis Framework: 1) Company Analysis: Past and Present (business model, revenue, profitability, working capital, capital structure) → 2) Industry and Competitive Analysis → 3) Company Analysis: Forecasting (revenue, expenses, capital investments, scenario analysis).
2 · Determining the Business Model
A business model describes a company's operations. Analysts answer five key questions to understand it.
Information Sources
Issuer sources: Regulatory filings (annual/quarterly reports), earnings calls, investor presentations, press releases, management discussions, company website.
Public third-party: Industry white papers, government economic indicators, news outlets, social media.
Proprietary third-party: Sell-side analyst reports, Bloomberg/FactSet, industry consultancies (e.g., Rystad, IQVIA, Gartner).
Proprietary primary research: Surveys, conversations, product comparisons.
Warehouse Club Inc. case study: Membership-based discount retailer with a virtuous cycle — low prices drive memberships, which drive sales volume, which drive negotiating leverage with suppliers, enabling low costs and low prices. Revenue streams: merchandise sales (low margin) and membership fees (high margin). Key drivers: number of stores, sales per store, membership count, membership price.
3 · Revenue Analysis & Pricing Power
Revenue analysis identifies drivers that explain the level and changes in revenues. Two approaches are commonly used.
Decomposes revenues into drivers such as:
Volume and price (units sold × average selling price)
Product line, segment, or geography revenues
Capacity‑based: stores × sales per store, same‑store sales
Return‑based: AUM × fee rate (for asset managers)
Example: Warehouse Club — net sales = average stores × sales per store; membership fees = average members × annual fee.
Expresses revenue as a function of:
Market size (total addressable market)
Market share (company revenue / market size)
GDP growth (for defensive/cyclical industries)
Example: Warehouse Club — market share of US retail sales (excluding autos) has grown from 48 bps to 70 bps.
Market Share = Company Revenue / Market Size
Market size = total demand for the goods/services offered by the company.
Analysts often include similar products and consider substitutes separately.
Pricing Power
Pricing power is a company's ability to set prices without losing sales volume.
Determined by market structure and competitive positioning.
In highly competitive markets (commodities, retail), firms are price takers; returns approximate cost of capital.
In less competitive markets (branded goods, utilities, patented pharma), firms have pricing power; can raise prices without losing customers.
Evidence of pricing power: rising profitability over time (prices increasing faster than costs).
Nestlé SA example: From 2011–2021, Nestlé increased prices while also increasing volumes and operating profitability — clear evidence of pricing power from brand investment (20% of revenues on R&D and marketing).
4 · Operating Profitability & Working Capital
Operating costs are categorized by behavior with output (fixed vs variable), nature, or function.
Fixed vs Variable Costs
Operating Profit = [Q × (P − VC)] − FC
Q = units sold; P = price per unit; VC = variable cost per unit; FC = fixed costs.
DOL = %Δ Operating Profit / %Δ Sales
Measures sensitivity of operating profit to changes in sales.
Higher fixed costs → higher DOL → more volatile operating profit.
Profitability Measures
Measure | Formula | What it Captures |
|---|---|---|
Gross Margin | Gross Profit / Revenue | Profit after cost of sales; approximate contribution margin. |
EBITDA Margin | EBITDA / Revenue | Profit before D&A, interest, taxes; proxy for operating cash flow. |
Operating Margin (EBIT) | EBIT / Revenue | Profit from core operations before interest and taxes. |
Net Margin | Net Income / Revenue | Bottom‑line profitability after all expenses. |
Working Capital Management
Cash Conversion Cycle (CCC) = Days Sales Outstanding (DSO) + Days Inventory on Hand (DOH) − Days Payable Outstanding (DPO).
DSO = Accounts Receivable / (Revenue / 365).
DOH = Inventory / (Cost of Sales / 365).
DPO = Accounts Payable / (Cost of Sales / 365).
A negative CCC means suppliers finance operations (e.g., Warehouse Club has negative working capital).
Net working capital = Current assets (excluding cash) − Current liabilities. Negative NWC = source of financing.
Warehouse Club case study: Gross margin ~11% (low), but membership fees contribute ~70% of operating profit. Working capital is negative (−5% of sales) with a cash conversion cycle of ~4 days — highly efficient. Operating leverage is low; SG&A is stable as a % of sales.
5 · Capital Investments & Capital Structure
Analysts evaluate how companies source and use capital, and whether returns exceed the cost of capital.
Sources and Uses of Capital
Cash flows from operations (including negative working capital)
Cash and investments on hand
Debt issuance
Equity issuance
Asset disposals
Net working capital (if positive)
Capital expenditures (PP&E, intangibles)
Acquisitions
Debt paydown
Dividends and share repurchases
Evaluating Capital Investments
Return on Invested Capital (ROIC) compares operating profits to invested capital. A positive spread over WACC indicates value creation.
Maintenance CAPEX sustains current operations (often approximated by depreciation). Growth CAPEX expands the business.
Degree of Financial Leverage (DFL) = %Δ Net Income / %Δ Operating Income. Measures sensitivity of net income to operating income changes.
DFL = %Δ Net Income / %Δ Operating Income
Higher interest expense → higher DFL → more volatile net income.
Net Debt to EBITDA is a common leverage ratio used by credit rating agencies.
ROE = Net Margin × Asset Turnover × Equity Multiplier
Example: Warehouse Club 2X19 ROE = 2% × 3 × 3 = 18%.
Low net margin, high asset turnover, and moderate leverage drive ROE.
Warehouse Club case study: ROIC consistently exceeded WACC by 200–700 bps, creating economic value. Capital structure is conservative — net debt is negative, DFL close to 1.0. Despite low margins, high asset turnover and negative working capital generate strong returns.