Global Investing

CHAPTER 8Company Analysis

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In Chapter 1 we discussed the characteristics of a good business. Good businesses operate in growing industries with relatively predictable pricing, hold a dominant and defensible position within that industry, and have a strong balance sheet, an astute management team, and a positive image in society. The characteristics of a good business can be further broken down into profitability, earnings sustainability, balance sheet strength, growth prospects, investment risks, and valuation. We now take a deeper look at each of these in detail.

Profitability

Profitability can vary significantly between distinct types of businesses. The amount of money needed to operate a business (its capital intensity), the required level of technical expertise, economies of scale in manufacturing or distribution, and brand recognition, product differentiation, and degree of competition in the industry all help determine a company's profitability. Differentiated products are those that have specific features that distinguish them from competing products and make them more desirable. The perception of scarcity or superiority typically allows businesses to earn higher profits on those goods. Often this is achieved through better functionality or quality, but differentiation can also be derived from brand name recognition. Luxury goods retailers are an excellent example of businesses that generate higher profits due to the perception of scarcity. Consumers ...