Company analysisIntermediate

How to analyse a stock

Analyzing a stock consists of connecting business, accounts, valuation and risk in a thesis that can be proven false. The objective is not to accumulate ratios, but to answer where the value will come from and what can prevent it.

3 min read Practical guide

By the end

You'll end up with a short thesis, three scenarios, and revision cues.

Start with the business

Explains client, problem, product, way of charging, competition and cost of growth. Identify the driver: units, price, subscribers, stores or volume. If you can't draw how a euro gets from the customer to the till, you still don't understand the company.

Translate narrative into numbers

Check organic growth, margin, conversion to cash, return on capital and balance sheet. Use several years and separate acquisitions, currency and extraordinary items. Profit must be reconciled with cash flow and stock exchange.

Example

Thesis: the margin will rise by scale. Required evidence: stable gross margin, expenses growing less than sales and FCF accompanying profit.

Evaluate scenarios

Project an adverse, central and favorable scenario with revenue, margin, shares and discounted multiple or flow. The target is not an exact figure: it is the result of visible assumptions. Change the most sensitive assumptions and see the range.

Decision and follow-up

Compare potential return with risk, alternatives and horizon. Define position size, quarterly indicators and invalidation. A price fall without a thesis change is different from one caused by structural deterioration.

Business model explained.

Reconciled accounts.

Advantage and risks.

Assessment by scenarios.

Invalidation and calendar.

From data to a decision

What must happen for value to rise?

This guide cannot predict the next move on its own. It can build a conditional reading: what supports upside, what increases downside risk, and which evidence must appear before acting.

Favourable reading

Revenue, margins, and FCF improve without damaging the balance sheet or valuation.

Adverse reading

Growth consumes cash, raises debt, or is already fully priced in.

Required confirmation

Build base, bull, and bear cases with measurable variables.

Reasoned example

If sales grow 10%, margin rises from 12% to 15%, and shares do not increase, EPS can outgrow sales; then test what the market pays for it.

Applied workshop

Turn the explanation into a process

Follow these steps in order and keep the result, so you can repeat the analysis and identify what changed your decision.

1Summarise customer, problem, product and monetisation in one sentence.
2Rebuild five years of growth, margins, return on capital and cash per share.
3Define moat, competition, balance sheet and three risks that could break the thesis.
4Value bear, base and bull scenarios and write monitoring and invalidation rules before deciding.

Review questions

Can you explain the economics without repeating the presentation?
Does growth create value per share?
Which price offers a margin against the bear case?

Worked case

From attractive product to thesis

A platform grows 25%, but the cost of acquiring customers rises 40%, retention falls and FCF depends on remuneration in shares. You may like the product and the investment may still be bad at the current price.

The thesis must convert growth into an economic unit: retention, incremental margin, cash and dilution. Then he projects scenarios and a condition that would show that the improvement does not come.

Decision rule

Don't end with "good company"; ends with mechanism, valuation, risk, horizon and invalidation.

Put it into practice

Summarize a company on one page: how it makes money, three metrics, balance sheet, central scenario, highest risk and data that would invalidate the thesis.