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How to Analyse a Company's Business Model


2. What is the Industry Outlook?

Growth and value investors alike seek out firms with above average sales and earnings growth prospects. The best prospects are usually found in fast growing industries. The selected stock picks will have to grow earnings by doing one or a combination of the following:


  • Cutting operational costs and managing expenses

  • Gaining market share from the competition

  • Acquiring other industry players

  • Developing new products and services

  • Entering new and different markets


Although many firms have successfully implemented these strategies, the tactics are inherently riskier than participating in a high growth industry. Short-list stocks by first determining which industries are growing rapidly with an optimistic future. Then, identify the top performing stocks within those industries.

Favourable industries have attractive long term sales growth forecasts and consistently maintain that trend. Industry earnings growth forecasts are also readily available to all market participants.


3. What are the Top Analysts Saying?

Review reputable analyst reports that cover consensus earnings growth forecasts across industries and stocks. Market analysts gain reputations based on the accuracy of their forecasts. They conduct in-depth research to track investment opportunities.

One can access analyst reports online or in print publications. Get a feel for their view of the market. It is also a great way for beginners to note the types of factors that should be evaluated when doing one's own analysis. Many brokers and banks publish growth forecasts and their view of where the stock, industry or market could be going.

Determine whether the average long term industry earnings growth outruns the company's sales growth, and by what percentage.

One can now get a feel for the potential profits one can make for the level of risk one is willing to undertake.


4. Who are the Competition?

A company's success is determined by how well it performs against the competition. The estimated industry growth rates and sales forecasts are only the starting point to analysing the business model. There are always companies that outpace their industry.

Once the major players are identified, research the company’s top three competitors. Who are the strongest competitors?

They usually have large sales and growth figure with the biggest profit margins. One may find that the short-listed company is not the best when compared to the competition. In this case, discard the original candidate in favour of the better competitor.


5 Conclusion

It is imperative to assess a company's business model before buying their stock. The performance of the stock depends on it.

Comparing stocks against industry peers and competitors helps one filter out average performers in the process of discovering the best investment opportunities with the highest profit making potential.


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