Lesson 1 of 8 · All lessons in this module
- Company research reports and the analysis framework
- Determining the business model
- Revenue drivers: bottom-up and top-down
- Pricing power
- Operating costs and operating leverageVideo lesson
- Operating profitability and working capital
- Integrated case: reading a marketplace from GMV, take rate and mix
- Capital investments and capital structure
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Lesson 1 of 8 · 11 min
Company research reports and the analysis framework
A research report turns company and industry analysis into a forecast, a valuation and a recommendation; an initiation report explains the company from scratch, while later reports only update what has changed.
In short
- Analysts value securities with financial statement models: forecast statements that express the analyst's evidence-based view of the future, not a puzzle with one right answer.
- The framework has three blocks: company analysis: past and present → industry and competitive analysis → company analysis: forecasting.
- An initial (initiation) report is long and written for readers who do not yet know the company: business model, industry, competitive position, financial model, valuation, ESG and risks.
- A subsequent report is shorter and written for readers who already know the company: what is new, how forecasts and valuation changed, and updated risks.
- Every report carries a recommendation with a target price and a discussion of risks. Structure, content and tone depend on the analyst's setting.
Why company analysis comes first
Equity analysts value shares and make recommendations from scenarios of future earnings, cash flows and financial position. Those scenarios are built as forecast financial statements, called a financial statement model.
A model is quantitative, but it is not a maths problem with a correct answer. It is the analyst's forward-looking view written in numbers, and every assumption should be backed by evidence and analysis.
Building that evidence is the job of company and industry analysis. It runs in three blocks, and this module covers the first: understand the company's past and present before judging its industry or forecasting its future.
| Block | What the analyst does |
|---|---|
| 1. Company analysis: past and present | Determine the business model; analyse revenue and its drivers; analyse operating profitability and working capital; analyse capital investments and capital structure (uses and sources of capital) |
| 2. Industry and competitive analysis | Define the industry; analyse its size, growth, profitability and market share trends; analyse its structure and external influences; judge the company's strategy, positioning and any competitive advantage |
| 3. Company analysis: forecasting | Choose what to forecast and how; forecast revenue, operating profitability and working capital, capital investments and capital structure; evaluate key risks and uncertainties |
The initial (initiation) report
When an analyst starts covering a security, the first report is an extensive initiation ('initiating coverage'). Its main audience is readers who are not already familiar with the company, so it explains the business from the ground up.
Expect a full description of the business model and strategy, often with charts splitting revenue and profit by product or region. It also includes an industry overview with tools such as Porter's five forces and PESTLE analysis (political, economic, social, technological, legal and environmental influences). These slow-moving topics are typical of initiations and rarely repeated in later reports.
| Section | Content |
|---|---|
| Front matter | Issuer name and security identifiers; recommendation and target price; legally required disclosures and disclaimers |
| Recommendation | Buy, hold or sell, and a summary of the key reasons |
| Company description | Business model and strategy; charts breaking down revenue and profit by product, geography and so on |
| Industry overview and competitive positioning | Industry size, growth, drivers, share trends and profitability; five forces; PESTLE; the company's position and strategy |
| Financial analysis and model | Key drivers of revenue, costs, profit, cash flow and capital; forecasts of those drivers; historical and forecast statements |
| Valuation | Company and security value with a target price, usually using relative and present value methods; key inputs, scenarios and sensitivities |
| ESG considerations | ESG indicators and risks; ownership structure and management; executive pay |
| Risks | Material downside and upside risks and how they are reflected in the analysis and valuation |
Subsequent reports and the analyst's setting
After the initiation, the analyst writes shorter subsequent reports, typically after the company publishes results or when new information or analysis changes the view. The audience already knows the company and wants to know what changed.
A subsequent report usually compares actual results with what was expected, interprets the new information, shows updated forecasts, explains changes to the valuation since the last report and updates the risk factors. Industry structure analysis is rarely repeated because it changes slowly.
The setting shapes the report. A sell-side report for external clients follows the formal structure above, while a report for colleagues at the analyst's own firm, who already know the issuer, may be a few slides or a verbal briefing.
| Initial report | Subsequent report | |
|---|---|---|
| Audience | New to the company or security | Already familiar with it |
| Length | Extensive | Short |
| Typical trigger | Analyst begins coverage | Results release, new information, changed recommendation |
| Distinctive content | Business model, industry overview, five forces, PESTLE, ESG, full model | Actual vs expected results, forecast changes, valuation changes, updated risks |
| Always included | Recommendation, target price, valuation, risks | Recommendation, target price, valuation, risks |
Think of the initiation as the textbook on a company and the subsequent reports as the news bulletins. If a report spends pages on the industry's five forces, it is almost certainly an initiation.
Worked examples
Example 1 Initiation or update?
A research note on Halvorsen Shipping ASA has six pages: a table of quarterly revenue and EBITDA against the analyst's estimates, revised forecasts for the next two years, a target price raised from NOK 140 to NOK 155 with the reasons, and an updated list of risks. Is this an initiation or a subsequent report?
Example 2 Placing tasks in the framework
An analyst at Rheinfeld Asset Management lists four tasks: (1) estimate next year's revenue; (2) find out how the company charges customers; (3) judge whether the company has a competitive advantage; (4) compute the company's historical gross margin. In what order should they be done?
On the exam
Expect concept questions on the audience and content of initial vs subsequent reports, which elements appear in every report, and the order of the three blocks of the framework.
- Thinking an initiation is triggered by a results release; that is a subsequent report.
- Assuming report structure is fixed; it depends on the setting (external vs internal, initiation vs update).
- Placing the evaluation of competitive strategy in block 1; it belongs to industry and competitive analysis, which still comes before forecasting.
- Treating a financial statement model as having a 'correct' answer; it expresses a justified view.
Check yourself
Q1The primary audience of an initiation report is most likely readers who:
Q2A report contains a PESTLE analysis and a five forces analysis of the industry. The report is most likely:
Q3Which element is most likely found in a subsequent report but not in an initiation?
Q4In the company and industry analysis framework, evaluating a company's competitive strategy happens before:
Q5Which pair of elements is common to all company research reports?
Answer the 5 questions: +10 XP for each one you get right first time.
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