Please enable JavaScript.
Coggle requires JavaScript to display documents.
MENTORING - Fundamentals - Company fundamentals - Introduction - Coggle…
MENTORING - Fundamentals - Company fundamentals - Introduction
When we are trading or investing, we should have a very clear understanding about the underlying company.
Investors for long have a right reason to understand about a company. But why should short term traders too understand about a company
Because they can get a number of inputs or trade ideas from fundamentals, and not technicals. A trade is manufactured or shaped up with fundamentals, not technicals. Technicals will merely propagate that opportunity.
How do large players, that is asset managers, assess a company. Since we are following them for our framework, we will see how and why they look at companies with certain attributes.
An asset manager is always focussed on risks.That does not mean they are not worried about returns. What we mean is they are focussed on risk-adjusted returns. That is they will look at return only after minimising the potential of a risk.
When we are beginning to learn company analysis, asset managers look at three important risks in a company before weighing in on a company for investment.
The risks are: (a) management risk; (b) P&L risk, or operational risk; (c) balance sheet risk, or liquidity risk. Any of these is going to pose a big risk for the most important aspect for asset managers, i.e, cash flow.
Apart from the above risks, a company can face two other risks, which asset managers focus on: (a) ecoystem and (b) macroeconomy.
An asset manager always does a top-down approach while finding companies for investing. However, momentum players and small institutions follow a bottom-up approach.
Asset managers take management analysis very seriously.
They want managements that are exhibiting 'candor', or openness. An open management is what they always like. That is why you see most top companies have good managements.
A management comprises two parts: (a) principal and (b) agent. This is called a principal agent model.
When a company is small the principal is the agent.
The principal is a person who takes the ultimate risk, He is the risk taker and owner of the company.
An agent is someone who has a outside view on the company and is running its operations for the principal.
Over time a company should and will move towards a principal-agent set up. That is when asset managers like it. They always want someone as a check for both sides.
In both cases, asset managers want management candor. In fact they go and meet managements to assess them better. But for retailers, the only source is media and annual report .That is public information.
A management can be assessed both qualitatively and quantitatively.
As retailers, we cannot assess them qualitatively like asset managers. Hence we depend on what those asset managers pick and then take it on from there by reading annual reports and public material.
However, we can assess them well quantitatively. That is we can size them up and their performance by numbers. This we will do by analysing profit and loss statement and balance sheet, along with the cash flow statement.