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CFA® Level I · Equities · free lesson
Company Analysis: Past, Present, and Future
Once the industry is understood, the analyst turns to the company itself: how it competes, what drives its revenue and margins, and how much capital it needs and how it finances it. This module shows how to judge a company's competitive position, decompose its revenue and profitability, test its pricing power, and evaluate its working capital, investment and capital structure, the building blocks of any forecast.
What you will learn
1. Explain a company's competitive strategy and evaluate its competitive position and the durability of its advantages within its industry.
- Generic strategies: cost leadership, differentiation and focus.
- Evidence of advantage: stable or rising share, superior margins or turnover, ROIC above WACC.
- ROIC = NOPAT margin x invested capital turnover; cost leaders and differentiators take different routes.
- Durable advantages come from network effects, switching costs, intangibles, cost advantages and efficient scale.
- The expected life of the advantage determines how fast forecast ROIC should fade toward WACC.
2. Evaluate a company's revenue drivers, operating profitability and pricing power.
- Decompose growth into volume, price and mix, currency and acquisitions; organic growth excludes the last two.
- Gross and operating margins reveal pricing and cost structure; compare with peers and history.
- DOL = contribution margin / EBIT; high fixed costs magnify the effect of sales changes on EBIT.
- Pricing power: raising prices faster than costs without large volume losses.
- Inflationary periods test pricing power through gross margin resilience.
3. Evaluate a company's working capital management, capital investment and capital structure.
- CCC = DSO + DIO - DPO; a negative cycle means suppliers finance operations.
- Interpret changes in DSO, DIO and DPO as signals of demand, credit and bargaining power.
- Capex / depreciation above 1 signals expansion; persistently below 1 suggests underinvestment.
- Net debt / EBITDA, interest coverage and debt / capital measure financial risk.
- Check that capital allocation is consistent with cash generation and leverage targets.
Module at a glance
- Generic strategies: cost leadership, differentiation, focus; test them with share, margins, turnover and ROIC.
- ROIC = NOPAT margin x invested capital turnover; durable moats keep ROIC above WACC for longer.
- Decompose revenue into volume, price/mix, currency and acquisitions; organic growth excludes the last two.
- DOL = contribution margin / EBIT; fixed costs magnify the effect of sales changes on profit.
- Pricing power shows up as price increases with little volume loss and stable gross margins.
- CCC = DSO + DIO - DPO; capex / depreciation reveals expansion or underinvestment.
- Net debt / EBITDA and interest coverage measure financial risk.
This free module has 3 lessons, 11 practice questions with full explanations.