Buy
or Sell Recommendation : How to read an equity research report?
By Mr. P
Saravanan, IIM Shillong
A lot of
information about companies trading on the share market is available in
business newspapers, television and internet.
Another
important source is equity research report written by analysts who are experts
in this field.
However, if
you are not familiar with such reports, these may appear as if they are
written
in some alien language. Let us see how to understand an analyst report.
Basically,
equity research report means analysing a particular company’s financials by
means of ratio analysis and comparing it with its own peer group, forecasting
the financials and arriving at a buy or a sell recommendation.
1. Basic information..!
An equity research report normally begins with
some basic information about the company, including the company’s ticker
symbol, exchanges on which its shares are traded, the primary sector and
industry in which it operates, the current stock price, market capitalisation,
liquidity, major shareholders of the company, significant recent developments,
an earnings forecast, a valuation summary, recommended investment action, etc.
2. Business description..!
This
includes a detailed description of the company, its products and services. It
explains the company’s economics, including the key drivers of revenues and
expenses.
Much of it
is sourced by analysts from the firm itself and via its regulatory filings, as
well as industry publications.
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| P Saravanan, IIM Shillong |
3. Management & governance..!
Under this section one may observe a critique
of the firm’s management and board, senior management’s history with the firm
and their record of capital allocation their compensation and incentive plans,
and levels of stock ownership. It also talks about whether there is a
succession plan in place for senior management.
A review of
the composition of the company’s board of directors and whether it is
sufficiently independent or if there is evidence or risk of entrenchment all
find mention here.
4. Industry overview & competitive positioning..!
This section provides an overview of the
industry dynamics, including a competitive analysis of the industry.
Generally,
one can find ‘Porter’s Five Forces’ framework for industry analysis. Additionally,
production capacity levels and pricing, distribution and stability of market
share are shown.
5. Valuation & financial analysis..!
Here, a thorough valuation analysis of the
company using conventional valuation metrics and formulas is shown. Equity
valuation models can derive either absolute or relative values.
Further, a
detailed analysis of the company’s historical financial performance, and a
forecast of future performance is included. Future performance is measured
using financial modeling techniques.
6. Investment risks..!
This section addresses negative industry and
company developments that could pose a risk to the investment decision. Risks
can be operational or financial, or /
related to regulatory issues or / legal proceedings.
To
conclude, an equity research report can include varying levels of detail, and
while there is no industry standard when it comes to format, what we have
discussed above are the elements one can see in a majority of analyst reports.
About the author
The
writer Mr. S Saravanan is associate professor of finance & accounting, IIM
Shillong.
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