How to do Business Analysis of a Company

Modified: 08-Jun-21

Whenever we look at the financial snapshot of any company, the first thing that we look at is the trend of its sales growth and its operating profit margin (OPM) over the last 10 years. One look at how the company has performed in terms of sales growth and the consistency of its OPM or the lack of it helps us a lot in business analysis and tells a lot about the strength of its business model.

The key thing to focus on sales is whether it is growing consistently or has seen periods of decline. Similarly, the key thing to focus for operating profit margin (OPM) is whether the OPM is stable over the years, or it is improving or it is declining over the years; alternatively, whether OPM is fluctuating cyclically over the years.

All these observations about the trend of sales growth and the OPM can be made by an investor in a single glance on the financial snapshot of the company for the last 10 years.

Moreover, these observations tell the investor about a very critical aspect of the business model of the company. An investor can get an idea of whether the company has a strong business model with stable or improving profitability or the company has a weak business model with declining or cyclically fluctuating profit margins.

Once an investor has observed the performance of the company on the trend of sales and its operating profit margin, then she can dig deeper through documents like annual reports and credit rating reports etc. to understand the reasons why the company has a particular behaviour in the trend of sales and profit margins.

Over the years, we have analysed hundreds of companies on our website with a focus on the analysis of their business. We have spent countless hours doing their business analysis by reading all of their public documents like annual reports, corporate announcements, conference calls, credit rating reports etc. to find out the parameters that determine the strength in the business model of those companies.

Therefore, in this article, we have summarized our learnings from the business analysis of those companies and the key factors that determine whether a company would have a strong business performance of weak business performance.

Key factors that decide the business performance

While analysing many companies, an investor notices that the key factors that determine whether a company would have a good or poor business performance are:

  • The uniqueness of the product or service and
  • Amount of competition that it faces

The uniqueness of the product or service determines whether the company produces an undifferentiated product or service. It means whether the customers can easily switch the supplier for the product/service or not.

The amount of competition, in turn, indicates whether the company faces a lot of competition from player whether domestic or international for its products or services. This parameter includes competition from both organised as well as unorganised sector.

At times, such companies have high entry barriers to reduce competition in terms of exclusive rights to a key resource needed to produce goods or provide service.

The uniqueness of the product and the amount of competition determines whether a company would be able to pass on the increase in the cost of its raw material to its customers to maintain its profit margins. This is because every customer wishes to have the best value for its money and as a result, the customers tend to delay giving a price hike to the supplier to the extent possible. If the supplier provides a low value-adding commodity product or provides a service that any other supplier can also provide, then the customer would always resist giving a price increase to the supplier because she would have a choice of many suppliers to give her the same good or service.

Many times, in the field of undifferentiated commodity products and services, the suppliers go out of business and shut their shop because they are not able to pass on the increase in raw material/input costs to their customers and as a result, they run into losses and are not able to survive tough period. These low value-adding product and services are the field where we see the suppliers competing with each primarily on price and operating with very low-profit margins due to price wars.

Over time, we believe that uniqueness of the product/service and the amount of competition are two key parameters that determine the fate of the business performance of the company over the long term. Once an investor has analysed a company and determined where the company stands on these two parameters, then she would be able to easily explain the business performance noticed by her in the financial snapshot for last 10 years.

Let us see the examples of companies in each of these types of business performance and understand the features that determine it.

Different types of business performance by companies

We have noticed that most of the companies show primarily one of the following patterns when an investor analyses their business performance i.e. trend of sales and operating profit margin.

  1. Stable or improving
  2. Declining and
  3. Cyclical

Let us see examples of companies showing each of these business performance trends and learn more about the factors that make the business performance stable or declining or cyclical.

A) Stable or improving business performance:

Many times, investors come across companies that have a stable or improving operating profit margin over the years. Most of these companies also have consistent sales growth over the years. Such kind of consistent profit performance and sales performance indicates that the companies have a stable or improving business performance over the years

Usually, these companies can pass on the increase in the cost of raw material to their customers. As a result, they can protect their profit margins. Upon deeper analysis, an investor finds that such companies have a uniqueness in their product in the terms of established quality or brand.

Let us see live examples of a few such companies to understand how different business characteristics determine a stable or improving business performance.

i) Supreme Industries Ltd (plastic processing industry):

Supreme Industries Ltd is a plastic goods manufacturer in India. The company manufactures plastic pipes, plastic furniture, cross-laminated films, protective packaging, composite LPG cylinders etc.

While analysing Supreme Industries Ltd, an investor notices that the sales of the company have grown at a pace of about 7-9% year on year from ₹2,469 cr in FY2011 to ₹5,511 cr in FY2020. During the 12-months ending June 2020, the sales of the company have declined to ₹5,129 cr.

An investor notices that the sales of the company have grown consistently over the last 10 years except FY2020 and the 12-months ending June 2020. The decline in the performance during this recent period is due to the lockdown and resultant slowdown due to coronavirus pandemic.

While looking at the profitability of the company, an investor notices that the operating profit margin (OPM) of Supreme Industries Ltd has been very stable during the last 10 years. The OPM has consistently been in the range of 14-16%.

Supreme Industries Ltd business analysis Operating Profit Margin Opm

While reading the annual reports and other documents related to the company, an investor notices that Supreme Industries Ltd can pass on the increase in its input costs to its customers within a gap of a few weeks.

FY2008 annual report, page 9:

In our Company’s product segments, the increase in raw material costs could be transferred to the product pricing within a time lag of 2 to 5 weeks.

FY2012 chairman’s speech, page 2:

Company is able to pass on the increased cost on all its products except commodity furniture.

The credit rating agency, CRISIL has highlighted this aspect of the business model of Supreme Industries Ltd in its report in July 2020.

Supreme is susceptible to volatility in the prices of key raw materials, polyvinyl chloride, high-density polyethylene, and polypropylene, which are affected by change in crude oil prices and foreign exchange rates, albeit partly offset by its ability to pass on price fluctuations to the consumers.

Therefore, an investor notices that the company has the ability to pass on the increase in its input cost to its customers within a few weeks and in turn maintain its profit margins. However, the company also faces a lot of challenges as not all the customers agree to price hike and also there is intense competition in certain business segments.

However, still, the company has avoided those business areas where it faces high competition from the unorganized sector and imports.

FY2011 annual report, page 8:

Your Company has selected its product portfolio in such a manner that it does not have to compete against imported plastics products.

The Company also avoids to remain in a line where it has to compete against unorganized sector. In certain products where the Company is making such products, the effort remains to have lower percentage of such business, within the overall turnover of that products, just to supply complete range to its distributors.

Moreover, the company has continuously tried to increase the share of value-adding products with a high-profit margin in its revenue. The share of value-added products was 29.83% of the total net turnover in FY2012 (Oct. 2013 presentation of the company, page 33), which has increased to 38.28% of total net turnover in FY2020 (May 2020 presentation of the company, page 36).

Therefore, an investor would notice that the decision of the company to avoid competing with imports, unorganized sector and focus on high value-adding products have given it an ability to pass on the increase in its raw material and other input costs to its customers.

As a result, Supreme Industries Ltd has shown a stable business performance with increasing sales and stable operating profit margins over the years.

An investor may read our complete business analysis of Supreme Industries Ltd showing all the challenges faced by it in its business as well as other key aspects of the company like the assessment of its management qualities in the following article: Analysis: Supreme Industries Ltd

Let us see the example of another company, which has shown improving business performance over the years.

ii) Associated Alcohols and Breweries Ltd:

Associated Alcohols and Breweries Ltd is an Indian distillery based in Madhya Pradesh dealing in country liquor, extra neutral alcohol, rectified spirit and Indian made foreign liquor (IMFL).

While analysing Associated Alcohols and Breweries Ltd, an investor notices that in the past, the company has been able to grow its sales at a rate of 20% year on year. Sales of the company increased from ₹91 cr. in FY2011 to ₹523 cr in FY2020. In addition, during this period, operating profit margins (OPM) has increased from 7% in FY2011 to 15% in FY2020.

Associated Alcohols And Breweries Ltd business analysis Operating Profit Margin Opm

The company operates in two segments, the country liquor segment and the Indian made foreign liquor segments. At the outset, an investor would notice that the liquor distribution business is highly regulated with a lot of entry barriers for any new player.

Nevertheless, in the country liquor segment, the prices are controlled by the govt. and as a result, there is little scope of passing an increase in the cost of raw material to the customers as the price is already fixed.

The credit rating agency, CARE, has explained the position of limited pricing power of Associated Alcohols and Breweries Ltd for country liquor, in its credit rating report for the company in March 2019:

Volatility in input prices with limited pricing power: AABL’s main raw materials are non-food grade grains which contain higher percentage of starch. Production of food grains in India is dependent upon the vagaries of the monsoons and consequently the prices remain volatile…. On the other hand, the main product of AABL, viz. CL, is supplied to the government at fixed rates.

The report illustrates that the main raw material used by Associated Alcohols and Breweries Ltd for producing alcohol is food grain. The production of food grain depends on monsoon and in turn, the production, as well as the price of food grain, is highly volatile. However, the state government predetermines the price of country liquor. Country liquor producers like Associated Alcohols and Breweries Ltd do not get an increase in selling price when the prices of food grains increase.

However, an investor notices that despite low pricing power in the country liquor segment, Associated Alcohols and Breweries Ltd has been able to significantly improve its operating profit margins. To understand the reasons of the same, when an investor reads the annual reports of the company, then she finds out that Associated Alcohols and Breweries Ltd undertook a few steps to strengthen its business model to protect itself from the low pricing power position in the country liquor segment.

a) Controlling operating costs by investments in the multi-grain processing facility:

In FY2017 annual report, Associated Alcohols and Breweries Ltd intimated its shareholders that the company has invested in a production facility, which can process different grains as raw material. This multi-grain processing facility provides the benefit of shifting from one food grain to another to produce alcohol whenever the prices of one food grain increase.

FY2017 annual report, page 27:

Multi-feed security: The AABL management selected to invest in equipment that would accommodate multi-grain feedstock as opposed to relying on molasses. This decision widened the company’s flexibility in being able to draw on diverse grain sources and moderate the impact of unforeseen cost increases by shifting from one grain source to another, particularly relevant in a business marked by a high raw material cost

As a result, Associated Alcohols and Breweries Ltd could protect its profit margins by controlling its raw material costs by using cheaper food grains to produce alcohol.

b) Increasing profit margins by focusing on high-margin Indian made foreign liquor (IMFL):

Over the years, Associated Alcohols and Breweries Ltd has increased its focus on selling Indian made foreign liquor (IMFL), which has higher profits. The share of IMFL in the overall sales of the company has increased year on year and as a result, its profit margins have increased.

The credit rating agency, CARE, has highlighted this aspect of the business of Associated Alcohols and Breweries Ltd in its credit rating report of January 2018 when it upgraded the credit rating of the company from BBB+ to A-.

The revision in the ratings assigned to the bank facilities of Associated Alcohols and Breweries Limited (AABL) takes into account growth in the company’s scale of operations during FY17 (FY refers to the period April 01 to March 31) along with continuous improvement in profitability, mainly on the back of increased focus on sales of value added Indian Made Foreign Liquor (IMFL).

The company has also acknowledged in FY2018 annual report that the sale of premium liquor has led to the improvement of profit margins.

FY2018 annual report, page 11:

The increased share of premium products in the sales portfolio enhanced margins over steady merchant ENA sales.

Therefore, an investor would acknowledge that despite the tough business environment of fluctuating raw material costs, fixed selling price, and intense competition, the company has been able to increase its profit margins because of a few key business decisions.

The company could control its costs by switching to a multi-grain processing facility due to which it could use cheaper food grains to produce alcohol. In addition, the company increased focus on the sale of Indian made foreign liquor (IMFL), which provide higher profit margins. As a result, Associated Alcohols and Breweries Ltd witnessed its profit margins improve over the years.

An investor may read our complete analysis of Associated Alcohols and Breweries Ltd in the following article: Analysis: Associated Alcohols and Breweries Ltd

In the above two examples, we read about companies that have shown improving business performance. These companies could report stable or increasing profit margins by way of controlling their operating costs, providing high value-adding products to their customers with better margins and in turn perform better than their competitors.

Now let us see the case where the business performance of companies has declined over the years and the reasons that lead to declining business performance.

B) Declining business performance:

Whenever doing business analysis of different companies, we have come many cases with declining business performance over the years. We have found that in most of the cases, the companies produce an undifferentiated commodity product. In such cases, the customers are not keen to stick to any one supplier because the products/services of almost all the suppliers are almost the same.

In such cases, the price of the product/service becomes the key decision-making parameter. As a result, we notice that there are frequent price wars in such segments where companies go to any extent of low-profit margins or even burning cash (free cash hand-outs) to customers to gain market share.

Over time, such kind of business become very tough and as a result, many companies go out of business and get acquired by other companies.

Let us see the example of a company operating in such a segment that has witnessed declining business performance over the years.

i) Quick Heal Technologies Ltd (antivirus industry):

Quick Heal Technologies Ltd is an Indian company providing security software solutions like antivirus, antispyware, antimalware etc. to retail consumers under brand Quick Heal and to enterprise & govt. segment under brand Seqrite.

While analysing Quick Heal Technologies Ltd, an investor notices that in the past, the company has been able to grow its sales at a rate of 10-15% year on year; however, the growth has nearly stagnated in the recent years with a negative growth rate for last 5 years. The operating profit margin (OPM) of the company had declined consistently from more than 50% in FY2012-FY2013 to 32% in FY2020.

Quick Heal Technologies Ltd business analysis Operating Profit Margin Opm

Quick Heal Technologies Ltd operates in an industry, which is highly competitive. Many players offer software security solutions, which seem to provide similar protection levels. Almost all the players claim to have won multiple awards for their antivirus solutions. Therefore, in the end, the purchase decision turns out to be based on the pricing of the product.

Quick Heal Technologies Ltd had elaborated on the tough competitive nature of its industry in its red herring prospectus (RHP) before the initial public offer (IPO) in FY2016.

RHP, Jan 2016, page 18:

Some of our competitors are global companies that have larger technical and financial resources and the broad customer bases needed to bring competitive solutions to the market. Such companies may use these advantages to offer solutions that are perceived to be as effective as ours at a lower price or for free as part of a larger product package or solely in consideration for maintenance and services fees.

The company highlighted that many of its competitors are large global companies, which have a lot of resources. These companies can price their software security products to their customers at a lower price and even free of cost as a package. Moreover, the consumers perceive that all branded antivirus solutions including Quick Heal provide a similar acceptable level of service.

Quick Heal Technologies Ltd highlighted that for the retail segment, it faces competition from companies like AVAST and AVG, which offer basic antivirus free of cost and then offer to provide additional services as a premium add-on.

RHP, Jan 2016, page 18:

Low-priced or free competitive products. Security protection is increasingly being offered by third parties at significant discounts to our prices or, in some cases is bundled for free. The widespread inclusion of lower-priced or free products that are perceived to perform the same or similar functions as our products within computer hardware or other companies’ software products could potentially reduce the need for our products or render our products unmarketable…. Thus, we face competition from competitors like AVAST and AVG which provide several freemium products and with whom we compete to acquire users, especially those users who are sensitive to pricing.

The company acknowledges that the retail consumer market for antivirus products faces very intense competition from companies willing to provide a low priced or free solution. As a result, the competition may even lead to the antivirus solution of Quick Heal Technologies Ltd as unmarketable.

The intense price-based competition of antivirus products leaves very low pricing power in the hands of solution providers like Quick Heal Technologies Ltd. Investors could witness the lack of pricing power of Quick Heal Technologies Ltd in FY2018 when the indirect tax on antivirus solutions was increased on commencement of goods & services tax (GST).

Feb 2018 conference call, page 14:

Rajesh Ghonasgi: You also need to consider one thing that before GST it was VAT, so we used to pay 6% and now with GST we are paying 18% GST on retail products so again that cost is being absorbed by the company because we cannot increase the MRP price, there is a lot of pressure on MRP actually as well as market driven price that MOP also there is a big pressure on that.

Quick Heal Technologies Ltd mentioned that in the enterprise segment, it competes with large global security solution players like Symantec (Norton), McAfee etc. as well as other players like Microsoft and IBM, which have large resources and can provide their solutions at a much lower price and even free of cost to the customer as a part of service & maintenance and other packages.

Recently Airtel, one of the leading telecom service providers in India, has started offering a one-year subscription of Norton antivirus (by Symantec) free of cost to its prepaid subscribers. (Source: Financial Express: Airtel reportedly offering 1-year free Norton antivirus to subscribers)

Therefore, an investor would appreciate that whether it is a retail consumer segment or the enterprise segment, the antivirus industry faces intense competition. There is hardly any pricing power in the hands of the players. The competitors are willing to offer their products at very low prices, even free of cost.

An investor may read our complete analysis of Quick Heal Technologies Ltd in the following article: Analysis: Quick Heal Technologies Ltd

Thus, in the above example of business analysis, we saw a situation where the business performance of the company is declining as the business environment is very intense and every company offers a similar product as cheap as possible.

Now let us see the next pattern of business performance, cyclical or fluctuating, which is the most common performance pattern that an investor would come across in her analysis.

C) Cyclical business performance:

In most of the companies that an investor would come across, she would find that the business performance of the company is neither consistently stable/improving nor declining. Instead, business performance is cyclical. She would find that the business performance is fluctuating with periods of high-growth and high-profit margins alternating with periods of low-growth and low-profit margins (even losses).

These are the kind of businesses, which are very brutal. These businesses are usually characterised by low technology, low capital intensive manufacturing processes, which leads to a sudden rise of many small unorganized players when the times are good i.e. when prices are rising. This leads to oversupply in the market and then prices start declining. When the cycle takes a turn and the prices decline, then many manufacturers are not able to survive the tough time and shut down the business. There are frequent bankruptcies, job losses, phases of consolidation, non-performing assets for banks etc. in these businesses.

Such fluctuating performance is a highlight of companies operating in any cyclical industry, where initially many players go for expansion of capacities in the hope of high demand in future. However, over time, the assumptions of increased demand prove incorrect due to internal/external factors. As a result, the anticipated demand increase does not materialize and instead the existing demand of the products declines. Therefore, the industry faces a situation of apparent oversupply and the sale volume as well as the sales price decline. The players find that their business operations have become less profitable/unviable. Therefore, many players go out of business/shut down their capacities, which results in a decline in the manufacturing capacity in the industry and shifts the balance of demand-supply equilibrium in favour of the suppliers/manufacturers.

As a result of the decline in manufacturing capacity, when the demand for the product revives in the business cycle, the remaining players find that they have gained the negotiating power due to limited supply. Therefore, the remaining players witness an increase in orders at higher prices leading to higher sales revenue with improving profit margins. This is the typical business cycle, which has played out in many cyclical industries over the years.

Let us see examples of such cyclical businesses.

i) HEG Ltd (Graphite Electrodes):

HEG Ltd, one of the leading graphite electrode manufacturers in India. Graphite electrodes are a key raw material to manufacture steel by electric arc furnace (EAF) process. Therefore, the steel industry is the major consumer of graphite electrodes.

While analysing HEG Ltd, an investor would note that the sale performance of the company over the last 10 years has been very fluctuating. HEG Ltd witnessed its sales increase from ₹1,102 cr. in FY2011 to ₹1,619 cr in FY2013. However, from FY2014 onwards, the company faced a very difficult time and as a result, its sales started declining year on year. Sales of the company declined to ₹859 cr in FY2017. From FY2018, the company witnessed a revival in its performance and in FY2019, it could increase its sales significantly to an all-time high of ₹6,591 cr. However, thereafter, the decline in the sales was equally quick and the sales of the company declined to ₹1,566 cr in 12-months ending June 2020 (i.e. July 2019-June 2020).

HEG Ltd business analysis Operating Profit Margin Opm

Such a huge variation in the performance of the company was not limited to only sales/revenue. HEG Ltd witnessed significant changes in profitability as well. The operating profit margin (OPM) of the company declined consistently from 20% in FY2011 to 9% in FY2017. However, all of a sudden the business performance of the company in terms of overall sales, as well as profit margins, improved in FY2018. HEG Ltd reported an OPM of 63% in FY2018 and 71% in FY2019. However, just as the profits have risen sharply, they fell equally sharply. HEG Ltd reported an operating loss in FY2020 as well as in 12-months ending June 2020 (i.e. July 2019-June 2020).

The typical business cycle of increasing and declining supply, discussed above, which has played out in many cyclical industries over the years, the graphite electrode industry in which HEG Ltd operates has also gone through similar cycles in the past.

An analysis of expansion strategies of HEG Ltd by reading its annual reports indicates that in and before 2008 economic crisis, the company announced its expansion plans of 20,000 TPA in August 2008 (from 60,000 TPA to 80,000 TPA). This was the period when the global steel industry, which is the major consumer of graphite electrodes, was on an uptrend in the business cycle. This period witnessed some larger mergers & acquisitions in the steel sector like Arcelor-Mittal (2006) and Tata-Corus (2007).

An investor would appreciate that such positive sentiment regarding the steel industry led to many graphite electrode manufacturers including HEG Ltd increase their capacity. However, soon thereafter, the 2008 financial crisis struck and the business cycle in the steel sector took a downturn. As a result, HEG Ltd had to scale down its expansion plans from 20,000 TPA to 6,000 TPA.

FY2009 annual report, page 13:

Capacity Expansion of Graphite Electrode Plant at Mandideep: In light of the slowdown in economic environment and steel industry that the global industry faced in 2008, HEG announced in August 2008 to moderate the expansion plans from current 60,000 MT to 66,000 MT (as against 80,000 MT planned earlier) in graphite electrodes at a contained cost of Rs. 42.50 crore as against Rs. 190 crore.

The company initially scaled down its expansion plans in FY2009 and deferred the addition of remaining 14,000 TPA manufacturing capacity. However, it did not wait for long and next year (FY2010) announced that it would go ahead with the expansion plans for 14,000 TPA.

FY2010 annual report, page 5:

Considering the improved scenario, we have expanded HEG’s capacity from 60,000 tons to 66,000 tons in the year under review. With this, our plant has become the largest single-site facility for graphite electrode manufacturing in the world, a feat which bolsters our confidence. The expansion has helped us achieve optimization of costs and better operating efficiencies. The current sentiments also gives us the confidence to move ahead with the next phase of expansion to take the capacity to 80,000 MTs per annum.

HEG Ltd continued with its expansion plans whereas the outside environment was becoming challenging. The company acknowledged it in its FY2012 annual report when its capacity expansion was completed.

FY2012 annual report, page 18:

On the face of it, the numbers showcase a gloomy picture of our working in 2011-12. However, there were some positive sparks, which helped progressively de-risk our business from volatile external factors.

Capacity expansion: Our 225 crore expansion was commissioned in February 2012. This provides us with the opportunity to increase our market share in the top-end of the graphite electrode market.

One of the features of cyclical industries is that during good times many players increase manufacturing capacity. These manufacturing capacities take some time to become operational and by the time these capacities are completed, the business cycle takes a turn. Thereafter, the demand of the product declines but the industry is ready with higher manufacturing capacity.

When an investor reads the annual report of the next year, FY2013, then she realizes that the above-mentioned scenario played out in the graphite electrode industry as well.

FY2013 annual report, page 12:

In 2012, the global economic momentum decelerated on account of various intertwined factors – the eurozone crisis, US fiscal cliff, forex volatility, disruption of global oil supplies and slowing investments in emerging economies. The result is that the global steel industry grew a mere 1.2% (but for China it would have gone down), the lowest in a decade. Global steel players incurred sizeable losses in 2012. As a natural extension, this affected graphite electrode demand. Long-term contracts gave way to need-based spot purchases. The global industry encountered a 100,000 MT increase in production capacity (65,000 MT in China), creating an oversupply that pared realisations.

HEG Ltd acknowledges that the capacity additions by the graphite electrodes manufacturers along with the dismal performance of the steel industry has created an oversupply situation in the industry. Moreover, the company fears that the situation is going to worsen in future. This is because more graphite electrode manufacturing capacity (130,000 TPA) is going to be completed in the coming year, which will further reduce the prices of graphite electrodes.

FY2013 annual report, page 14:

While the demand side appears tentatively encouraging, supply side estimates suggest 130,000 MT of additional graphite electrode capacity coming into play in 2013-14 (100,000 MT in China), increasing the overhang and depressing realisations.

In FY2014, the graphite electrode industry is faced with challenging times of high manufacturing capacity and declining demand. As a result, the sales volume as well as the sales price decline.

FY2014 annual report, page 14:

Fiscal 2013-14 was one of the most challenging years for the international graphite electrode industry due to a number of concurrent factors: slow economic growth, political inertia in India, weak global steel industry (excluding China), decline in graphite electrode realisations and rising inventory. Not surprisingly, some of the largest global electrode manufacturers reported losses.

The same aspect was highlighted by the credit rating agency, India Ratings in its April 2015 report of HEG Ltd:

Revenue declined 9.6% yoy in FY14 and around 13% (provisional) in FY15, led by lower volumes and realisations in the graphite electrodes (GE) business due to overcapacity and a slowdown in the steel sector, which drives GE demand. The capacity utilisation decreased to 70% in FY14 and remained at the same level in 9MFY15 (FY13: 78%).

Further advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

In such a situation, it does not come as a surprise to the investor when she reads that a few graphite electrode manufacturers shut down their manufacturing capacities.

FY2014 annual report, page 15:

Two global electrode majors announced capacity closure, virtually removing 90,000 TPA of capacity from the marketplace. Going ahead, we are optimistic that this evacuation will correct the industry oversupply, improve realisations and encourage competitive players to aspire for higher growth.

The pain of the downturn in the business cycle of the graphite manufacturing industry extends further and the prices decline to such a level that any production of graphite electrodes becomes a loss-making affair for the manufacturers. In such times, closing down of the manufacturing capacity seems to be the best alternative to many producers.

FY2018 annual report, page 25:

In the recent years, electrode prices fell to unviable levels as cheap iron ore and coking coal made BOF route cheaper as compared to EAF steel, hitting the EAF steel mills who chose to re-roll blast furnace-produced semis, or utilise merchant pig iron. For every electrode they made, western producers lost money, and consequently shuttered capacity as a survival strategy. About 200,000 TPA of electrode manufacturing capacity was closed over the last 3-4 years in the western world.

On the face of it, an investor may feel that such cyclical turn of events in the cyclical industries is predictable. An investor would believe that the events are following a predictable pattern of player announcing capacity expansions during good times. The capacities become operations in 2-3 years. However, by then, the industry cycle has taken the downturn. As a result, the industry faces a situation of oversupply, which leads to lower sales volumes as well as the lower sales price. Therefore, players report losses and then shut down capacity.

Such turn of events may seem highly predictable. However, predicting the timing of such events is not predictable. Even the promoters/managers who earn their livelihood by operating in these cyclical industries day and night, many times get their predictions wrong.

After the above analysis of HEG Ltd, an investor would appreciate that the timing of going ahead with the capacity expansion of 14,000 TPA, which was completed in FY2012, may not be the best. However, in FY2014, the management of the company expected that the troubled times for the industry are over in FY2014 and things should improve going ahead.

FY2014 annual report, page 15:

My assessment this time is that we have hit the trough and hereon we should see a recovery, albeit a slow and steady one. We were back to the wall, fighting all these factors and the entire team at HEG showed exceptional resilience and a resolve to do better. Adversity invariably brings out the best in the brave.

However, looking at the financial performance of the company in the coming years of FY2015, FY2016 and FY2017, an investor would notice that the worst was not behind the company in FY2014. The worst was yet to come in future years.

FY2015 annual report, page 15:

The international graphite electrodes industry was affected by overcapacity despite 1,20,000 tonnes per annum capacity going off the market during the year under review, indicating the grimness of the industry position.

FY2016 annual report, page 11:

The steep reduction in EAF steel production affected the demand and prices of graphite electrodes. In the past two years, graphite electrode manufacturing capacities reduced by about 200,000 MT. Despite these capacity closures the current capacity utilisation of the electrodes industry is still close to 70% showing continued pressure.

HEG Ltd reported losses in its graphite electrode business in FY2016 and FY2017 and it reported losses on the consolidated level in FY2017. The management acknowledged in FY2017 annual report that the last five years (FY2012-2017) have been very tough for the graphite electrode industry.

Therefore, an investor may note that even the people who are making a living by working in a cyclical industry like the promoters of the companies are not able to correctly predict the short-term future of a cyclical industry.

The recent phase of high profits in the industry (FY2018-2019) also ended when the newly announced capacity expansions got completed and the temporary shortage of the electrodes resolved. As a result, soon thereafter, the company started reporting operating losses. There were already some signs indicating developments in this direction.

  • India removed anti-dumping duty on imports of graphite electrodes in Sept 2018 (HEG Ltd, Feb 2019 results presentation, page 6):

India removed antidumping duties on graphite electrodes imported from China in September 2018 which has increased imports.

  • China increased the production of graphite electrodes and has completed the capacity increase of graphite electrodes before the new electric arc furnace (EAF) steel plants, which were expected to use these new graphite electrodes could be completed. (HEG Ltd, Feb 2019 conference call, page 5-6). As a result, an investor would appreciate that there would be a tendency of China to export the surplus graphite electrode production until the EAF steel plants become operational.

So what we believe is that there has been probably a mismatch where the capacities of existing non-UHP electrode making in China, those capacities have probably come maybe six months, maybe nine months earlier than the newly built Greenfield steel plants. So in a nutshell, what we are probably assuming is that the electrode capacities have come in earlier than the new steel capacities are coming in.

In light of the above analysis, an investor would appreciate that the graphite electrode industry like its customer (steel industry) is a cyclical industry in which the event tend to alternate with good and bad phases. In good phases, the companies go for capacity expansion, which later on leads to overcapacity. The oversupply, later on, leads to lower sales and prices resulting in losses for manufacturers, which then shut their plants.

Thereafter, the oversupply situation corrects itself by way of the closure of plants by the manufacturers and the manufacturers find that the demand for their products is increasing. This increased demand is an indication of the return of good times and the manufacturers see the sales volume and sales prices increasing. This increase in demand for the products leads to the next phase of capacity additions by the manufacturers and thereby start of a new business cycle.

An investor may read our complete detailed analysis of HEG Ltd in the following article: Analysis: HEG Ltd

An investor would appreciate that in the case of non-differentiable commodity businesses where the product prices witness large fluctuations, companies witness periods of high-growth and high-profit margins alternating with periods of low-growth and low-profit margins (even losses).

Steps to do business analysis (long method)

From the above discussion on business analysis showing different performance patterns like stable & improving business performance, declining business performance or cyclical-fluctuating business performance, an investor would note that the following two factors play a key role in determining the fate of the company and the industry.

  1. The uniqueness of the product and
  2. Competition in the industry

An investor may look at the financial snapshot of the company for last 10 years and then notice the trend of sales and operating profit margin (OPM) to assess whether the company has stable, improving, declining or cyclical business performance. However, she needs to do a deeper analysis of:

  • annual reports,
  • credit rating reports,
  • conference calls
  • draft red herring prospectus and other public documents

to understand what the uniqueness of the company’s products is and what the level of competition it faces is.

Only then she would be able to have a good view of the business of the company.

However, if the investor is short on time and still wishes to do a business analysis to assess the competitive advantage of the company against its peers, then she may follow the below step by step short approach to business analysis that stresses on the sales growth of the company and compares it with the competitors at different parameters.

Steps to do business analysis (short method)

Finding whether a company has Moat or distinct business advantage is the main aim of a fundamental investor. From the above discussion, an investor would appreciate that in-depth reading of annual reports, credit rating reports and other public documents are needed to do complete business analysis for any company.

However, if an investor wishes to do a quick check of whether a company has any distinct business advantage (Moat) or not, then a consistent history of year on year (YoY) sales growth serves as a very good substitute for primary market research for finding out Moat. It has served me well to identify good companies, which have grown their market share consistently over the years.

If a company has minimal or no growth in its sales for the past 10 years, then it is certain that it does not have any Moat. Whereas a YoY sales growth of 20% or more indicates that, the company is doing something that is rewarding it with higher sales.

Let us see two companies, which reflect a stark contrast in the compounded annual growth rate (CAGR) of sales over 10 years period of 2011-2020: Astral Poly Technik Ltd. and Tata Steel Ltd.

Astral Poly Technik And Tata Steel Ltd Comparison Of Sales Growth Rate For Last 10 Years

We can see the significant difference in the business growth of Tata Steel Ltd and APTL over the 10 year period of 2011-2020.

Given a choice, an investor should always avoid companies which show minimal/no growth over extended periods in past e.g. Tata Steel Ltd which has grown at a meagre rate of 2%. When a company is not able to grow at the rate equal to the inflation rate, then an investor should question whether the company is able to pass on the normal inflationary increase in its raw material to its customers. If it is not able to pass on the increase in its raw material costs to its customers, then it is possible that the company would take a hit on its profit margins when its input costs increase.

We believe that an investor should prefer companies that show a growth rate of at least equal to the inflation rate. The higher the growth rate, the better.

However, the criteria of high sales growth should not be taken at face value. Sales growth must be analysed in detail to conclude whether the company has genuine business advantage leading to growth or it is fudging its accounts to show high growth.

Analysis of consistent sales growth to find out competitive advantage “Moat”

Whenever an investor finds a company that has been growing its sales at a good rate (e.g. more than 15% YoY) for past 10 years, she should analyse it further to find out whether it is due to due to the distinct business advantage (Moat) of the company:

1. Comparison With Industry Peers:

If a company has sales growth of 15% YoY for the past 10 years whereas its peers are growing at a lower rate, then it might have a Moat. However, if all the peers are also growing at the same pace, then the company might not have any distinct advantage.

Let us compare the sales growth of Astral Poly Technik Ltd, which is a manufacturer of plastic pipes, with other companies of the same industry during 2011-2020. The table below contains sales figures for each company over 10 years period from 2011-2020.

Plastic Pipe Manufacturers Comparison Of Sales Growth Rate For Last 10 Years

We can see that sales of Astral Poly Technik Ltd have grown at a rate of 23%, which is more than the growth of Supreme Industries Ltd (9%) and Finolex Industries Ltd. (5%). It leads us to conclude that Astral Poly Technik Ltd has some advantage (Moat) over and above its peer that is helping it to grow at a faster pace.

2.  Increase In Production Capacity And Sales Volume:

Sales growth can come from two sources: the increase in the price of the product per unit and increase in the volume of sales (number of units sold). If a company were able to increase the price of its product consistently without a decline in demand for its product, it would seem great at first instance. However, if sales growth over years is driven solely by the increase in product prices and not by an increase in sales volume, then it is an unsustainable growth because over time, other substitutes of the product will appear in the market and the company would face irrelevance.

Therefore, it is important that the company, apart from increasing prices, should also increase its market reach by selling its product to more and more customers. Previously, the data of units of product sold by the company over years used to be available in the annual report of every company. However, nowadays, many times, companies do not provide the data of quantities produced and sold in the annual reports. If an investor can get the capacity utilization data from different other sources like credit rating reports, annual reports etc, then it may serve as a tool to ascertain the quantity produced by the company in any year.

Nevertheless, if even the capacity utilization data is not available, then an investor may use the production capacity data as an alternative.

While analysing the sales and the production capacity data for Astral Poly Technik Ltd, an investor notices that over FY2011-2020, the sales of the company have grown by 23% year on year and at the same time, the production capacity of the company has grown by 20% year on year.

Astral Poly Technik Comparison Of Sales Growth And Prodution Capacity

From the above data, we can appreciate that the production capacity of Astral Poly Technik Ltd has increased almost at the same pace as the sales growth. Therefore, even though we may not have the data of the exact quantity of products sold by the company over last 10 years, still, we may conclude that a significant portion of the increase in sales over last 10 years is contributed by higher quantities of products sold by it.

This pattern is healthy as the increase in product prices seems to be at an annual growth rate (CAGR) of 3-5%, which is in line with the inflation rate. Most of the sales growth by Astral Poly Technik Ltd seems to be by finding more & more consumers for its products. These consumers had choices of buying products from Astral Poly Technik Ltd’s competitors and buying substitute products. However, they decided in favour of Astral Poly Technik Ltd. This is a strong sign of distinctive business advantage (Moat) enjoyed by the company.

3. Conversion Of Sales Growth Into Profits:

A company, which has a distinct business advantage (Moat) will generate increased profits with an increase in sales. Many companies increase their sales by spending a lot on unnecessary capacity additions; heavy sales promotions, marketing & advertisement push which leads to a short term increase in sales. However, high expenses in terms of interest on debt taken to fund unnecessary capacity and marketing expenditures ensure that the growth in sales does not benefit shareholders in terms of increased profits.

Therefore, it is paramount to check whether increased sales have led to equivalent growth in profits. Sales growth without an increase in profits means that there is no business advantage.

Let us see how Astral Poly Technik Ltd fairs on this parameter.

Astral Poly Technik Ltd Comparison Of Sales And Profit Growth Rate For Last 10 Years

We can see that Astral Poly Technik Ltd has not only maintained its profitability over the years but also increased its profit margin from 8% in FY2011 to 10% in FY2020. This increased profitability has led to Astral Poly Technik Ltd’s profits to grow at a higher annual rate (CAGR) of 25% against sales CAGR of 23%. These are signs of a definite business advantage (Moat).

To compare we must see the example of a company, which has increased its sales at a good pace over the years but was not able to maintain its profitability. Oil and Natural Gas Corporation Ltd (ONGC) is a good example of one such company.

ONGC Ltd Consolidated Comparison Of Sales And Profit Growth Rate For Last 10 Years

We can see that ONGC grew its sales a good rate of 15% over 10 years from 2011 to 2020. However, most of this growth came from the acquisition of HPCL, which was funded by taking huge debt. The company had to pay huge interest on the debt it had taken. Its product is crude oil, which is a commodity product, where the buyer can easily use crude oil of another supplier offering similar grade crude oil to replace the crude oil from ONGC, thereby offering no distinct business advantage.

In the acquisition, ONGC added the fuel retailing business of HPCL in its portfolio of products & services. However, in the fuel retailing, petrol or diesel sold by the company at the retailing station is also a commodity product. Petrol/diesel sold by one company is exactly similar to that sold by another company. So a buyer can easily switch from the products of HPCL (ONGC) to another company without any challenges.

The result of the debt-funded acquisition was that the company could not convert its growth in sales into higher profits. Despite a growth in the sales of about 3.5 times (15% CAGR) from FY2011 to FY2020, its profits in FY2020 (₹10,907 cr) became nearly half of what they were in FY2011 (22,456 cr). Its net profit margin (NPM) declined from 20% in FY2011 to 3% in FY2020.

4. Conversion Of Profits Into Cash:

We must check whether the growing profits are being received by the company as cash. We learnt in Financial Analysis of a Companythat:

“A company that sells any product today might not receive its payment immediately. However, it is legitimately eligible to receive it. Therefore, accounting standards allow it to report this sale and its profit in the P&L. However, the money received from buyer will be reflected in cash flow from operations (CFO) only when the money is actually received from the buyer. Therefore, if we compare profit after tax (PAT) and CFO for any one year, they would differ from each other. However, over a long time, cumulative PAT and CFO should be similar.

If cumulative PAT is similar to CFO, it means that the company is able to collect its profits in actual cash from its buyers. If CFO is abysmally lower than PAT, it would mean that either the company though legitimately eligible to receive money from buyer, is not able to collect it or the profits are fictitious. In either case, the investor should avoid such a company.”

Let us see whether Astral Poly Technik Ltd is able to convert its profits into cash.

Astral Poly Technik Ltd Comparison Of Profit And Cash Flow From Operations For Last 10 Years

Thus, we can see that profits generated by Astral Poly Technik Ltd over the last 10-years (₹1,152 cr) have been collected in cash flow from operating activities (CFO = ₹1,752 cr). It checks that profits are not inflated or fictitious. This confirms that the business advantage (Moat) enjoyed by the company is for real.

5. Creation Of Value For Shareholders From The Profits Retained By The Company:

Any company can do two things with the profits it generates from its operations. Either it can distribute all the profits to its shareholders or it can retain some/all of it with itself to invest for growth of operations. Any company, which has a sustained business advantage (Moat) will generate greater value for its shareholders from the profits it retains with itself after paying dividends. Warren Buffett says that any company must generate at least $1 in market value for every $1 it retains with itself.

In this section, we discussed examples of different companies:

  • Astral Poly Technik Ltd that grew its sales at 23% year on year for the last 10-years with increasing profits that were collected as CFO.
  • Tata Steel Ltd that grew its sales at a low growth rate of 2% over the last 10 years and
  • Oil and Natural Gas Corporation Ltd (ONGC), which grew its sales at a good rate of 15% over the last 10-years; however, to chase this growth, its profits declined by 50% over the last 10 years.

Let us check how Astral Poly Technik Ltd, Tata Steel Ltd and ONGC compare on the parameter of creating value for shareholders.

Astral Poly Technik Ltd Tata Steel ONGC Value Created For Shareholders In The Last 10 Years

Thus, we can see that Astral Poly Technik Ltd created the value of ₹15.2 for every ₹1 of profits retained for investment by it, whereas Tata Steel destroyed a value of ₹1.1 for every ₹1 of profits retained by it and ONGC destroyed a value of ₹1.2 for every ₹1 of profits retained by it.

In effect, Tata Steel and ONGC destroyed the value of shareholders’ money that it decided to invest in its own business, which does not have any distinctive business advantage (Moat). On the contrary, we can see that Astral Poly Technik Ltd has generated huge value for its shareholders because of the distinctive business advantage it enjoys.

Let us see how the share price of the three companies, Astral Poly Technik Ltd, Tata Steel and ONGC has performed over the last 10 years from April 1, 2010, to Nov. 3, 2020. (Source Moneycontrol).

Astral Poly Technik Ltd Tata Steel ONGC Share Price Movement In Last 10 Years

In the above chart, we see that over the last 10 years (April 1, 2010, to Nov. 3, 2020), Astral Poly Technik Ltd has increased its share price by about 71 times whereas the share prices of Tata Steel Ltd and ONGC have declined by 35% and 63% respectively. Therefore, we notice that over the last 10-years, Astral Poly Technik Ltd has created significant wealth for its shareholders whereas Tata Steel Ltd and ONGC have destroyed the wealth of their shareholders.

Thus, we can see that an individual investor, who does not have enough time and resources to conduct primary market research like visiting company stores, manufacturing plants, meet its customers, suppliers, vendors, interacting with industry stakeholders, experts etc., can also identify companies with distinct business advantage (Moat) by conducting a detailed step by step analysis of sales and profit growth and in turn, create wealth for herself in the long term.

Summary of business analysis

In the current article, we learnt about business & industry analysis (BIA) of a company before investing in its stock. We learned that the uniqueness of the product and the extent of competition are two key parameters that determine the business performance of any company.

In order to determine the competitive strength of business of any company, an investor needs to assess the uniqueness in its product. She needs to assess whether the company’s product/service is a low value-adding commoditised product where the customer is indifferent to different suppliers. Or the product is a high value-adding one for which the customer is able to pay a higher price and stick to the supplier for her future purchases.

If the product/service is a low value-adding, commoditised one, then the company is expected to face immense competition from the unorganized sector as well as imports. As a result, the company is expected to face declining business performance or face a cyclically fluctuating performance with periods of high growth and high-profit margin alternating with periods of low-growth and low-profit margin.

To arrive at any conclusion about the nature of the product and the level of competition, an investor needs to do an in-depth reading of:

  • annual reports,
  • credit rating reports,
  • conference calls and
  • other public documents of the company

This is the best method to do the business analysis of any company.

However, in cases where the investor is short on time; but, still, she wishes to assess the competitive strength of any company, then she may follow the below steps to do a quick analysis.

  1. Comparison with industry peers: The Company must show sales growth higher than peers. If its sales growth is similar to peers, then there is no Moat.
  2. Increase in production capacity and sales volume: The Company must have shown increased market penetration by selling higher volumes of its product/service. Sales growth that comes only by increasing the price of the product is not sustainable because overtime, substitute products start appearing in the market.
  3. Conversion of sales growth into profits: A Moat would result in increasing profits with increasing sales. Otherwise, sales growth is only a result of unnecessary expansion or aggressive marketing push, which would erode value in long term.
  4. Conversion of profits into cash: Increasing profits due to Moat must be collected as cash. Otherwise, either the profits are fictitious or the company is selling to any John Doe for higher sales without having the ability to collect money from them.
  5. Creation of value for shareholders from the profits retained by the company: The Company with Moat will create significantly higher market value for its shareholders for every INR of profits retained by it. If a company were destroying the value of shareholders money, it would never have a Moat, however fast it may show its sales to be growing.

Thus, if an investor can find a company, which has shown high sales growth (>15-20%) over last 10 year and which can pass the test of 5 parameters discussed above, then she can be certain that she has found a company which has a sustainable business advantage. Such companies have the potential to create significant wealth for their shareholders over long periods. She should invest in such companies and stay with them for decades.

Investors around the world use many more parameters to judge the presence of Moat. Return on Equity (ROE) and Return on Capital Employed (ROCE) are the prominent parameters being used by many investors for this purpose. However, I am not a great proponent of ROE and ROCE and I believe that if an investor can test the company on above 5 parameters, then she can be reasonably certain that the companies invested by her have strong indications of distinct business advantage (Moat).

This concludes the current article on business & industry analysis of a company. In future articles on the series “Top Stocks to Buy”, I would discuss the management analysis and taking final investment decision about a company.

Let us now address some of the important queries related to business and industry analysis asked by investors.

Investors’ Queries: How to do Business Analysis of Companies?

Is an increase in the market cap being less than retained earnings a red flag?

Dear Sir

I am interested in knowing if there is a situation where the company’s retained earnings are increasing & its market capitalization is decreasing & if an investor is interested in earning passive income by way of tax-free dividend, does it really matter whether the stock price is really going up or down?

E.g. Analysis: Noida Toll Bridge Company Limited (DND Flyway)

Even if the stock price has gone down can we say it has destroyed value for the shareholders because in reality it has earned & retained some income & added value for the shareholders?

Maybe for some shareholders who bought the shares when the prices were relatively high it could be the case of value destroyer but for those who are holding the shares even before that & intends to do so how can it be a value destroyer?

As long as the business is doing as is expected from it & adding value how does it matter how the market is reacting to it?


PS: I am not holding this stock. This discussion is purely from the educational point of view.

Author’s Response:


Thanks for writing to me!

The return from any stock is a combination of two factors: dividends and capital gains (share price increase). It means that if a stock gave a dividend of ₹10 during an investors holding period but lost ₹10 in share price, then an investor effectively did not make any return over her holding period. Therefore, dividends and share price increase both are important.

Retained earnings mean the profits which are not distributed to shareholders. If any company retains any profits (i.e. does not give them to shareholders), then it must invest them in a way that the value of the company increases. It is agreed that the investments may not increase the value of the share (the price of share) immediately or over a few years, but over long periods e.g. 10 years, the earnings retained must get reflected in the increase in the share price. Otherwise, it is better if the company does not retain any profit and distribute 100% of it to shareholders.

Read: How to do Management Analysis of a Company

A shareholder, as an owner of the company, has appointed the management to create value from the investments being done. If the management/company is not creating value, then it has no reason to be in existence.

Hope it makes the picture clearer. If you have any further query, then I would be happy to answer.



Related Query:

Dear Dr.

You have told that an increase in the market cap should be more than the retained earnings for 10-year data. Suppose any stock became undervalued due to any reason, its increase in MCap may go down than the retained earnings. What should we do in this case?

Please guide. 

Author’s Response:


Thanks for writing to us!

Ideally, 10 years is a long period and the company should have got sufficient opportunity to create value for shareholders from its retained earnings. However, if all the other parameters are excellent, and the investor is certain about the fundamental strength of the company, then she may look at it a sign of undervalued opportunity.

Nevertheless, in such cases, an investor should do deeper due diligence to understand the reasons why the market has not valued the company appropriately. It may not be a condition where an investor is entering a value trap considering it as an undervalued opportunity.

All the best for your investing journey!


Dr. Vijay Malik

Related Query:

We are very thankful to you for providing such invaluable information regarding company analysis for investment. Sir, in the majority of the companies analysis you have mentioned: “$1 in market value for $1 of earnings retained”.

My doubt is that when there is a bear market, the majority of the good companies (companies selected as per your shortlist criteria) fail to meet this criterion. Similarly, in a bull market, even the worst companies will meet this criterion. Kindly tell your viewpoint.

Author’s Response:

Thanks for your feedback. I am happy that you found the articles useful.

You are right that in a bear market, most of the companies might fail this test whereas in the bull market most of the companies would pass this test. However, that would happen only if you take the $1 test only for a short duration.

If you use this test for long periods of time, which covers bull as well as bear phases, then this test makes a lot of sense and true wealth creators get differentiated from wealth destroyers.

I use $1 test for the past 10 years because most of the times a period of 10 years coves entire business cycle (sometimes multiple business cycles).

Hope it clarifies your query!


Dr Vijay Malik

Where to get important data about the company’s business?

Hi Vijay,

I honestly have learnt a lot from your blog and I have started my analysis on the stocks as you have described in this blog.

But I am facing a problem with the available data on the internet. Like in the Business Analysis segment as you have mentioned checking for a parameter “Increase In Production Capacity And Sales Volume” but for this, the quantity sold (i.e. Sales Volume) and Price is not available in all the annual reports of a company even the production capacity is also sometimes not there like other data we can have from Balance Sheet or Cash Flow Statement.

Is there any alternative source to find those data?

Many thanks,

Author’s Response:

Thanks for writing to me!

You are right that the information about production capacity and volume is many times not available in the annual report. You may try to get it from either credit rating press release of the rating agency, which would have rated the company or from any equity research report, if publicly available.

Otherwise, you might need to contact the management of the company to get the necessary data.

Read: How to contact companies for clarifications and additional information?


How to find if a company is a low-cost producer in the Industry?


How can anyone find whether a company is a low-cost producer compared to its peers in the same industry by looking into the annual report?

Author’s Response:

Thanks for writing to me!

You may compare the operating margins or EBITDA margins of different peers. The company with the highest operating margin or EBITDA margin is usually the lowest cost producer.



How to find peers of a company

Hello sir,

Great work to be appreciated…

However, I’m getting stuck with finding suitable peers in the industry, as I’m researching Kanpur Plastipack Limited. So when it comes to its peer comparison. I can’t find because Kanpur Plastipack Limited main product is IFBC and I don’t know how to find other suitable players in IFBC or in that industry reliably…so is there any way out for such case…

Author’s Response:


Thanks for writing to me!

You are right that many times, finding exact peers becomes a challenge. This is routinely a case in SMEs, where a particular company may be operating in a niche area. A web search would help you get details of more suppliers for the exact product who are present on wholesale portals like Indiamart etc. Alternatively, you may try contacting the dealers/distributors or call the company directly.

All the best for your investing journey!



Reader’s inputs about assessing the business strength of companies

I can clearly see that if the past performance of a company has been really good and we should definitely give credits to the management. But my only contention is to what extent!! In my own personal experience, only 3-4 of my colleagues out of the top 20 rankers have consistently performed well throughout even after schooling (change in business dynamics/competition etc). Well, others might have reverted to the mean.

When we take a sizeable position in our portfolio, while independent past data due diligence is extremely important, it would be great if we can understand what dynamics can a particular business face and how well is the management positioned to face those dynamics and keep competition still at the shore.

I agree, it’s not very easy to understand a particular niche industry very much in-depth without domain expertise. However, as an active group of investors, we should try to understand why the past figures are so consistent with consistently high IRR’s. Maybe we can find the answers to our question which will help us understand the business much better and we can hold with a higher level of conviction. I will try from my side if I can get something additional on this.

You have created a fabulous website and doing an amazing job to educate all of us.

Author’s Response:


Thanks for your valuable inputs! These are helpful for the author as well as other readers of

I agree that an investor must have the conviction to hold the stock through thick and thins of business cycles and also that the sources of conviction are different for each investor.

In the end, it all boils down to putting time and effort towards gaining knowledge of what an investor feels the most important factors.

Wish you the best for your investing journey.


Dr Vijay Malik

I would like to have your feedback on this series of articles. It would be very helpful if you can tell the readers about the parameters you use for analysis of companies & their stocks.



Registration status with SEBI:

I am registered with SEBI as a research analyst.

Details of financial interest in the Subject Company:

I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.

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2 thoughts on “How to do Business Analysis of a Company

  1. Thank you, Dr Malik,
    Your article on analysing companies for an in-depth analysis, for identifying companies with not so good potential and the five principles for testing the financial strength of the companies on a sustained basis is very informative.

    Dr Malik Sir, please clarify increase in sales growth, OPM, realised profit and retained earnings and incremental value in the market capitalization of the company, are acceptable if the growth is financed by debt subject to the debt to equity ratio and total outside liabilities (TOL) to total net worth (TNW) is within acceptable limits because sales growth in the present scenario is happening due to acquisitions funded by debt.


    • Dear T Sri Krishna,
      Thanks for your message.
      We believe that before making any opinion about the company an investor should do a complete analysis of the company on all the parameters like financial, business, management and valuation analysis along with peer/competitor comparison. We are not able to provide opinion on limited hypothetical information.
      You may share a detailed analysis of any company with us and we would be happy to share our inputs to your analysis along with any queries.
      Dr Vijay Malik

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