The Art of Company Valuation and Financial Statement Analysis: A Value Investor's Guide with Real-life Case Studies

Chapter 5

Business Model Analysis

Quantitative data are useful only to the extent that they are supported by a qualitative survey of the enterprise.

Benjamin Graham

 

The business model describes the success factors of a business. It should be seen as the counterpart of the figure-based part of company valuation introduced so far and comprises the qualitative characteristics of an enterprise. Extraordinary ratios are always the consequence of an extraordinary business model. While ratios only document economic success or failure in the past, conclusions about the future competitiveness can be drawn from the business model.

The market position of a company and the analysis of its business model, both introduced in this chapter, aim to identify and classify unique features and competitive advantages. The investor Warren Buffett once summarized his investment principles as follows:

We only invest in a company if (1) we understand their business, (2) the long-term prospects of the business are good, i.e. demonstrated earning power, good returns on equity, little or no debt, attractive business, (3) the company is led by competent and honest managers and (4) the company’s valuation is very attractive.

The aim of this chapter is to define clear principles to clarify points (1), (2) and (3). Unlike the financial ratios introduced earlier, these qualitative characteristics cannot be precisely determined and quantified. Nevertheless, the true art of company valuation lies in the analysis ...