Company Research Template

Management quality

1. 1. First, we need to find out who is guiding the ship.

      • Find the CEO/CFO/CTO from the most recent Annual (10K) report

      • Look them up online and see if they have a good reputation and are trustworthy.

   2. Find management's track record.

      • Have they been with the company for a long time?

      • Look them up on LinkedIn and find their previous positions with other companies. Determine how successfull were those companies.

   3. Do they manage to implement the plans they are saying they will?

      • This depends on how long they have been with the company.

   4. Find out if they have skin in the game. 

      • Check company stock ownership; look the company's latest Proxy Statement

      • We want management who have a big chunk of their personal wealth invested in the company in the form of stock or options

      • Just type '' *Company name* proxy statement'' in Google

   5. Are they buying or selling company shares? 

      • Here is a website that will help you with that: OpenInsider.com 

   6. Look into management's capital allocation strategy, normally found in the company's latest Annual (10K) Report

      • Are they planning to buy back shares, and is that done at a fair price?

        1. Defining a historical "fair price" can be tricky but does not need to be an exact science. 

      • Are they planning to increase or cut the dividend? 

        1. Dividends should be the last resort of a company to return capital to its shareholders due to their double-taxation nature. First, company profits get taxed at source. Then, once distributed out to owners of the company stock, they get taxed one more time on shareholder level as dividends are a taxable form of income. This is definitely not a way of maximizing the value of company profits.

        2. Companies frequently cut dividends too late because it's a last-ditch effort to save money and because it sends the negative signals to shareholders, some of whom might be keeping the company in their portfolio solely for the purpose of receiving its dividends.

Performance metrics

1. 1. Free Cash Flow

      • As previously mentioned, the company's ability to generate Free Cash Flow is one of the most important factors in determining whether we are going to buy its stock. At the end of the day, why would you invest your money in a company that only burns cash and gives nothing in return?

      • There are a lot of free websites out there that you can use to check the historical data on FCF generated at the end of each year. I use QuickFS due to its simple interface. Its database covers US, UK, EU, Australian and Canadian companies

      • Simply search for your company of interest. From the drop-down on the right, switch from "Overview" to "Key Ratios" and scroll down to Free Cash Flow under "Supplementary Items"

   2. Growth potential

      • In order to determine the company's stock price's fair value, we need to know its growth potential. Knowing this will allow us to get a better idea of what future returns we can expect, which is what we will use to calculate our entry price.

      • This can be and usually is tricky to evaluate. You can go over the historical revenue growth of the company and conservatively extrapolate into the near future, but at the end of the day, it's only going to be a prediction. This is where investing becomes a form of art. 

      • Certainly pay attention to the historical growth of revenue and FCF, but also think about what market changes can impact and ultimately change its growth patterns. 

        1. Has the market been favourable for a certain type of companies recently ( for example: geopolitical tensions positively impact stock prices of defence companies, distressed financial markets are good for consumer defensive stocks since people still need to eat, etc ...)

        2. The government's attitude towards a particular sector is starting to change (for example, China had a tech sector crackdown in 2022 that lasted 2 years and completely decimated the price of tech stocks).

        3. Raising inflation will normally cause stock prices to go down since investors will be looking to move their money to more stable investments with higher expected returns.

      • "Its better to be vaguely right than exactly wrong."

   3. Margins

      • There are a few margins that we need to consider, and they are all represented as a percentage of the company's revenue for the quarter or for the year. On their own, margins do not really tell us all that much, but when compared to competitor's margins, they paint a picture that describes how well a company is doing. If company A has better profit margins compared to company B, then we can be pretty certain company A is doing something better and will with time pull ahead of company B.

      • Margins can be easily calculated using figures from the company's last annual report, but some websites freely provide them for anyone to use. Once again, I use QuickFS for this purpose, and margins can be found under the "Key Rations" drop-down of a ticker's page.

        1. Gross margin tells what part of the revenue is left after a company pays for its cost of goods

        2. Operating margin tells us what part of the revenue is left after a company pays for salaries, marketing, administrative expenses, depreciation and amortization

        3. Net margin tells us what percentage of the company's revenue is converted to profit after paying tax and interest on its debt.

        4. Free cash flow margin is the pure cash left in the company's profit after re-adding depreciation/amortization previously removed from the operating profit calculation.

   4. Return on Invested Capital

      • Also known as ROIC, it is a performance metric that shows the rate of return a company is making on its internal investments. Great management teams will get high double-digit returns on the capital they have invested in their company. 

      • A simple example might help explain ROIC. Company A invests $1000 in a t-shirt printing press. Following the purchase of the press, the company increases its sales by $1000, from which they make an additional $200 of pure profit. This means that on the $1000 initial investment, the company receives $200, which in mathematical terms adds up to 20% ROIC.

   5. Price-to-FCF

      • Price to free cash flow can, and in my opinion should, be looked at in a similar way as a dividend yield, even though you do not get direct access to the cash a company generates. It basically tells you how overvalued or undervalued a company is.

      •  Simply put, P/FCF tells you how much of the company's cash you are entitled to for each share you own. Great companies trading at low price-to-FCF ratios are very rare and difficult to find. The emphasis here is on GREAT, as we do not want to invest in distressed companies even though they seemingly produced a lot of cash last year or last quarter. Price-to-FCF is important, but just like everything else in investing, it is just one piece of the puzzle.

      • If Company A's stock costs $10 and each share is "entitled" to $1 of cash (calculated by dividing last year's FCF by the number of total shares outstanding), then you have a price-to-FCF ratio of 10.

The following table is rather simple but gives you a good idea of the company's performance over the past 10 years. 

Competition

1. 1. First and foremost, you need to find out who the competition actually is. Sometimes companies list their main competitors on their annual reports. Don't be afraid to use Google to find a company's competition by simply asking it, "*Copany name* competitors" or if the company you are researching has some well-known products, you can also search for "*Product name* alternatives". 

   2. Once you have defined the competition, you want to dig into the financial statements of all companies and come up with a table similar to the following:

      • Firstly, you will need to come up with your own performance metrics to use— revenue, growth, profit margin, FCF margin, price-to-FCF are always a good starting point

      • Having this table will clearly show you which company is doing better in certain areas and lagging behind in others.