Elements of Company Research Report

Financial analysts utilize specialized models when examining financial statements. The objective is to assess and offer investment guidance on issuers’ equity securities. These aren’t just any models; they’re quantitative blueprints that echo an analyst’s anticipations for the future – encompassing future earnings scenarios, cash flows, and the financial stance of the company in question.

It’s crucial to understand that these models don’t equate to mathematical problems with a singular correct answer. They’re reflections of the analyst’s viewpoints. And like any professional viewpoint, they should be anchored in evidence and fortified by thorough scrutiny.

Company and Industry Analysis

Company and industry analysis is the process of forming and justifying a view of an issuer’s future financial results and position. This involves studying past and present financial statements to form a view of future financial results.

The above figure summarizes company and industry analysis. Starting from the left:

• Company Analysis: Past and Present: This is the foundational block, where analysts dive deep into a company’s historical data and present circumstances. It involves understanding the business model, revenue streams, and capital structures. For example, an in-depth examination of a company’s historical financial statements would fall under this category.
• Industry and Competitive Analysis: Moving a step further, analysts venture into the broader industry landscape. This is where they gauge the industry’s size, growth trajectories, profitability metrics, and market share trends. Additionally, they gauge the industry’s size, growth trajectories, profitability metrics, and market share trends.
• Company Analysis: Forecasting: The final stretch of the analysis focuses on the future. Using insights gleaned from the previous stages, analysts project future revenue, profitability, capital investments, and potential risks. It’s this forward-looking perspective that helps analysts predict a company’s future earnings and cash flows, forming the basis for investment recommendations.

In essence, the framework provides a structured approach, ensuring that analysts consider all critical factors before making investment recommendations.

Company Research Reports

Initial Reports

The company research reports contain analysts’ company and industry analysis, as well as their valuation and investment recommendations. The structure, content, and tone of a company research report are dependent on the analyst’s setting.

In the case of public issuer equity securities, reports created for external clients, known as “sell-side reports,” typically include a comprehensive initial report when the analyst starts covering the security. This is often called an “initiating coverage” report or “initiation.”

The structure of the initial company research report is given in the following table:

Initial Company Research Report Elements

$$\begin{array}{l|l} \hline
\textbf{Section} & \textbf{Details} \\
\hline
\textbf{Front Matter} & \text{Issuer, security, analysts} \\
& \text{recommendation, target prices,} \\
& \text{disclosures, disclaimers, legal} \\
\hline
\textbf{Recommendation} & \text{Analysts’ summary reasons.} \\
\hline
\textbf{Company Description} & \text{Issuer’s business model, strategy,} \\
& \text{key charts and figures.} \\
\hline
\textbf{Industry Overview and} & \text{Analysis of industry metrics,} \\
\textbf{Competitive Positioning} & \text{competitive landscape, external} \\
& \text{influences, industry position,} \\
& \text{strategy.} \\
\hline
\textbf{Financial Analysis and Model} & \text{Evaluation, forecasting of revenue,} \\
& \text{costs, profitability, cash flows,} \\
& \text{financial statements.} \\
\hline
\textbf{Valuation} & \text{Estimation of company, security} \\
& \text{values, target prices, discussion} \\
& \text{on key inputs, analyses.} \\
\hline
\textbf{ESG Considerations} & \text{Assessment of ESG indicators,} \\
& \text{risks, ownership structure,} \\
& \text{management composition,} \\
& \text{executive compensation.} \\
\hline
\textbf{Risks} & \text{Evaluation of potential risks} \\
& \text{impact on financial analysis} \\
& \text{and valuation.} \\
\end{array}
$$

Subsequent Company Research Report

Follow-up reports are more concise compared to the initial ones. These reports are designed for readers already acquainted with the issuer or security, seeking updates related to new data, analyses, or shifts in the analyst’s recommendations.

The structure of a subsequent report depends on the analyst’s setting and the nature of the report. For example, an analyst might deliver a short verbal report or a few presentation slides to update the internal team on the latest financial results of Microsoft Corp.

The typical elements of subsequent elements are given in the table below:

Subsequent Company Research Report Elements

$$
\begin{array}{l|l}
\hline
\textbf{Section} & \textbf{Details} \\
\hline
\textbf{Front Matter} &
\begin{array}{l}
\text{- Analysts’ names} \\
\text{- Issuer name} \\
\text{- Security and exchange identifiers (e.g., symbol, CUSIP)} \\
\text{- Analysts’ recommendation: buy, hold, sell} \\
\text{- Current security price and analysts’ target price} \\
\text{- Disclosures, disclaimers, and other legal requirements}
\end{array} \\
\hline
\textbf{Recommendation} &
\begin{array}{l}
\text{- Analysts’ updated recommendation} \\
\text{- Summary of changes from the prior recommendation} \\
\text{- Supporting explanations for any changes}
\end{array} \\
\hline
\textbf{Analysis of New Information} &
\begin{array}{l}
\text{- Comparison of quarterly results to projections} \\
\text{- Interpretation of new data} \\
\text{- Adjustments to prior forecasts based on new data}
\end{array} \\
\hline
\textbf{Valuation} &
\begin{array}{l}
\text{- Review of prior financial statement forecasts} \\
\text{- Updated forecasts based on new data} \\
\text{- Updated company and security value estimates} \\
\text{- Discussion of any changes from the prior report’s valuation}
\end{array} \\
\hline
\textbf{Risks} &
\begin{array}{l}
\text{- Updated risk factors} \\
\text{- Detailed discussion of any changes from prior risk assessments}
\end{array} \\
\end{array}
$$

Question

Which of the following is the most likely primary factor that determines the structure of a subsequent report after the initiating coverage report?

1. The analyst’s setting and the nature of the report.
2. The financial models used in the report.
3. The future earnings and cash flows of the issuer.

The correct answer is A.

The structure of a subsequent report after an initiating coverage report is most likely determined by the analyst’s setting (e.g., institutional or retail clients) and the nature of the report (e.g., an update report, a recommendation change, or a full analysis). This will dictate the level of detail, the focus of the analysis, and the specific aspects of the company that are emphasized, such as financial performance, outlook, or market developments.

B is incorrect. While the financial models used in the report are an important part of the analysis, they do not determine the structure of the report. The models are tools that the analyst uses to support his or her analysis and recommendations. It’s noteworthy that the structure of the report is determined by the analyst’s setting and the nature of the report.

C is incorrect. The future earnings and cash flows of the issuer are important factors that the analyst will consider in their analysis, but they do not determine the structure of the report. The analyst will use financial models to forecast the issuer’s future earnings and cash flows and to value the issuer’s securities, but the structure of the report is determined by the analyst’s setting and the nature of the report.