Analysing the company: a guide for the investor

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YEREVAN, 12 September. /ARKA/. The start-up phase in any new business is difficult and interesting. It is at this point that you need to clarify as many details as possible for yourself - even the ‘simple’ and ‘obvious’ ones - and set guidelines. One of the most important steps for a novice investor is to build a portfolio. The number of issuers and securities on the market seems immense, which, on the one hand, complicates the choice, but on the other hand, provides many opportunities./pp

At this point, it is important to rely on your attitudes and, at the same time, not to overestimate the available resources - knowledge, time and funds. Try to act in two directions - consult with professionals and conduct independent analyses./pp

This article explains how investors can research the market and find a company that matches their plans and objectives./pp bIssuer's activities /b/p b /bp

You should get a general idea of the company: its history, managers, business lines. Although a rational approach to investing is first and foremost important, choose an organisation whose products and policies you understand and are close to. By identifying the specifics of the business, you will see more clearly what requirements and market trends players should meet/pp bExternal factors /b/p b /bp

To get an idea of the company's prospects in the near future, assess macroeconomic indicators: GDP dynamics - an important indicator of the pace of development, unemployment rate, interest rates, demand for credit, currency exchange rate, etc. Pay attention to the forecasts of the main regulator and the Ministry of Finance, as well as foreign rating agencies analysing country risks.nbsp;nbsp;nbsp;nbsp;nbsp;/pp

For long-term investing - 10 years or more - business correlation with market ups and downs is not a key indicator. In such a case, stocks overcome several cycles and volatility is smoothed out./pp

In a buy-and-hold strategy, it is important to choose issuers that will remain competitive in the future. This should be based on the company's performance and the investment attractiveness of the sector./pp img width=669 src=/upload/medialibrary/00a/00aec868580456208e229f198c1da66e.jpg height=445 title=фридом alt=фридомbr/pp bSelect an industry /b/p b /bp

Check the websites of your local stock exchanges to see where the leaders of the top indices are performing. For example, the health care and technology sectors are currently the main growth sectors of the SP 500./pp

Evaluate how dependent the sector in which the company operates is on legislative changes and what risks are typical for it. Independent analytical publications, investor portals, and major banks write about this./pp bFinancial indicators /b/p b /bp

For detailed evaluation of a company, a huge number of indicators related to various aspects of the business are used. Let us describe the main parameters that an investor can independently investigate when selecting an issuer/pp iRevenue /i- all funds that the organisation has received from its activities./pp iProfit /i- the company's earnings including expenses. Unlike revenue, the minimum amount of which is limited to zero, profit can be negative./pp iEBITDA /i(Net Income, Taxes, Interest Expense, Depreciation Amortisation) - earnings before taxes, interest on loans and costs associated with the depreciation of equipment. This indicator is necessary to compare companies internationally, as each state sets its own taxation rules and credit rate./pp

Market capitalisation is the value of a company on the stock exchange. It is calculated by multiplying the value of one share by the number of securities in circulation./pp iDebt /i- the company's loans and borrowings. It is necessary to pay attention to short-term, long-term and net debt. The last indicator is calculated as the difference between total debt and cash, including potential earnings from the sale of liquid assets./pp iEnterprise Value/i - the sum of capitalisation and net debt./pp

When comparing the investment potential of different issuers, one should abstract from scale. For example, one company may be worth less than another, but generate commensurate profits and therefore be efficient./pp bMultipliers /b/pb /bp

To evaluate issuers on a single scale, multiples are used - indicators reflecting the ratio of different factors./pp iP/E/i (price to earnings) - market capitalisation to annual net profit. It allows determining how many years the company will pay for itself. A negative value of the multiplier indicates that the business is unprofitable. When comparing companies with an indicator exceeding zero, the one with a smaller P/E is considered more successful./pp iP/S/i (price to sales) - the market value of a share in relation to the proceeds from its sale. The multiplier allows you to see the prospects of the company, even if it is not yet profitable, for example, due to high start-up costs. Since revenue cannot be negative, P/S is applicable to the valuation of any issuer./pp iP/BV/i (price to book value) is an indicator reflecting how much of the company's assets are per share. It allows determining the revenue in case of sale of all assets and repayment of debts. P/BV greater than one means that in case of bankruptcy the issuer will not be able to pay debts to all shareholders./pp iDebt/EBITDA/i is a multiplier that shows how many years it will take a company to pay off all its debts from its profits. The lower its value, the better./pp iEV/EBITDA/i - ratio of the company's value to pre-tax profit. The multiplier allows comparing issuers with different debt and tax burdens. It reflects more details than P/E, as it refers not to capitalisation, but to the real market value. A low value of the indicator indicates that the investor's investment will pay off relatively quickly./pp iDPR /i- the ratio of dividends paid to net income. A high DPR means that shareholders receive good payouts./pp

Dividend policy depends on the company's activity and type of securities. For example, technology startups that issue growth stocks prefer to invest profits in development rather than share them with investors./pp

In contrast, stocks of companies from stable sectors are often dividend-paying. They avoid serious downturns, but are less promising./pp

Return on equity (ROE) is an indicator of how well the money invested in a company is being used. If it does not exceed the risk-free rate, the business cannot be called successful. ROE is calculated as the ratio of net profit to the company's capital./pp nbsp;img width=669 src=/upload/medialibrary/450/450c4b872dde642ac29a9233e5e937fb.jpg height=445 title=фридом alt=фридом/pp bSources for analysis and valuation/b/pp

An investor can find basic and derived parameters in several sources:/pp

- Company's official website: description of activities, structure and strategy, financial performance reports (revenue, net profit, EBITDA, equity), dividend history./pp

- Stock exchange websites: index dynamics, rates, stock quotes, trading results./pp

- Services for analysing financial indicators: specialised sites and broker's application provide basic parameters and multiples./pp

- Mass media: data on the situation in the economy and industries, evaluation of large companies, identification of trends, market news./pp

- Analytical and rating editions: forecasts about growth and fall of shares, actual and potential positions of issuers on the market./pp

In conclusion, let us describe the nuances that should be taken into account when analysing companies according to the proposed plan:/pp

- Compare the performance of a particular organisation with the industry average./pp

- Consider as many parameters as possible: profit, revenue, capitalisation, debts, etc./pp

- The use of multiples is most effective when comparing companies from the same industry./pp

- Interpret the multiples taking into account the age of the company and the direction of its activities./pp/pp/pp/pp iThis article was prepared within the framework of the joint project ‘The Year of Investing in Oneself’ by ARKA, AMI Novosti-Armenia news agencies and /ia href=http://ffin.am/en/iFreedom Broker Armenia/i/ai./i/p