A practical 30-minute company review

The purpose of a fast-reading guide is practical understanding. Here is a repeatable first-pass review you can carry out with an annual report and a spreadsheet. Thirty minutes is enough to identify major questions, not enough for a complete investment decision.

Figure 1The 30-minute review

1. 0–5 minUnderstand the businesscustomers, products, competitors
2. 5–10 minScan profitabilityrevenue and margins over several years
3. 10–15 minFollow the cashprofit versus operating cash flow
4. 15–20 minCheck resiliencecash, obligations, debt, interest
5. 20–25 minAssess capital usereturns, capex, acquisitions, buybacks
6. 25–30 minPrice and next stepsvaluation measures; questions to research

Minutes 0–5: Understand the business

Describe the company’s customers, products and competitors in plain language. Identify its claimed advantage and one plausible threat to that advantage. If you cannot explain how the company makes money, begin there.

Minutes 5–10: Scan profitability

Record revenue, gross profit, operating profit and net profit for several years. Calculate margins and look for sustained changes. Investigate unusual income or losses rather than assuming every reported item will repeat.

Minutes 10–15: Follow the cash

Compare net profit with operating cash flow. Record capital expenditure and calculate simplified free cash flow. Ask how much spending is necessary to maintain current operations versus expand them.

Minutes 15–20: Check financial resilience

Record cash, short-term obligations, total borrowing and interest expense. Note major debt maturities. Review receivables and inventory when sales growth seems disconnected from cash collection.

Minutes 20–25: Assess capital use

Look at returns on equity or invested capital, capital expenditure, acquisitions and share repurchases. Ask whether additional capital has produced worthwhile returns.

Minutes 25–30: Evaluate the share price and next steps

Check P/E and other relevant valuation measures. Consider whether the price depends on unusually optimistic assumptions. Write down what you still need to verify before making a judgement.

One-page review worksheet

What should trigger deeper research?

An unexplained gap between earnings and operating cash flow; falling margins hidden by sales growth; repeatedly rising debt; significant short-term refinancing needs; expensive acquisitions; aggressive adjustments to profit; unusual related-party transactions; or a valuation that leaves little room for disappointment.

One warning sign may have a reasonable explanation. Several warnings together demand greater scrutiny.

Figure 2Signals that justify deeper research

• Ask: Earnings and operating cash flow divergewithout explanation
• Ask: Margins fall while sales growhidden by growth
• Ask: Debt keeps risingor large near-term refinancing
• Ask: Expensive acquisitionsor aggressive profit adjustments

Set up the spreadsheet once

A small template makes every review faster and every review comparable. Set up one sheet with a column for each of the last five years and rows for the figures the review needs: revenue, gross profit, operating profit, net profit, operating cash flow, capital expenditure, cash, borrowings, lease liabilities, equity, shares on issue and dividends. Add calculated rows beneath for the margins, cash conversion, free cash flow, net debt, ROE, ROIC and earnings per share.

Filling in the raw figures takes most of the thirty minutes the first time. After that, adding a new year takes a few minutes, and the calculated rows update themselves. Keep a note beside any figure that needed judgement, such as whether interest was classified as operating or financing cash flow, so that later years are entered the same way.

Know where each answer lives in the report

Annual reports follow a similar order, so the same places supply each step of the review.

Figure 3Where the 30-minute review finds its answers

• Annual report
  • Directors' report and review of operationsthe business and its strategy
  • Income statement and segment noterevenue, margins, segments
  • Cash flow statementoperating cash flow, capex, acquisitions, dividends
  • Balance sheet, borrowings and lease notescash, debt, maturities, covenants
  • Remuneration reportwhat management is paid to achieve
  • Auditor's reportkey audit matters and any warnings

Market data, such as the share price, the number of shares and the market value, comes from the exchange or a market data service rather than the annual report. Note the date of any price you use, because the review compares a price on one date with results for a past period.

A worked review of a fictional company

To see how the steps fit together, here is a first-pass review of Precision Seal Systems, the imaginary manufacturer from Chapter 1. All figures are fictional.

Minutes 0–5, the business. Precision makes specialised seals built into customers’ production lines. Switching suppliers requires testing and downtime, which may protect its position. A plausible threat is a new sealing technology approved by a major customer.

Minutes 5–10, profitability. Over five years, revenue rose from $40 million to $50 million. Gross margin held between 44% and 46%, and operating margin between 18% and 20%, including a year when steel prices rose sharply. That is consistent with pricing power.

Minutes 10–15, cash. Operating cash flow averaged about 105% of net profit. Capital expenditure ran close to depreciation, with one larger year for a new production line. Free cash flow was positive every year.

Minutes 15–20, resilience. Net debt is about one times EBITDA, with no large maturity in the next three years, and interest coverage above 10 times. The receivables note shows no rise in overdue balances.

Minutes 20–25, capital use. ROIC stayed between 15% and 17%. The share count was flat. One small acquisition was made, and the goodwill is modest.

Minutes 25–30, price. At the assumed price, the P/E based on average earnings is about 18 and the free cash flow yield about 5%. A reverse calculation suggests the price assumes steady mid-single-digit growth.

Figure 4Precision Seal Systems after the first pass

• Avoid: Business understood, advantage plausible
• Avoid: Margins steady, including under cost pressure
• Avoid: Profit converted to cash; free cash flow positive
• Avoid: Modest debt, no near-term refinancing wall
• Avoid: Returns well above a typical cost of capital
• Ask: Customer concentration not yet checked
• Ask: Threat from new sealing technology not assessed
• Ask: Price assumes growth continues; check the order book

The review does not say whether to buy. It says that the business looks sound on every measure checked, and it identifies three questions that matter: how concentrated the customers are, how real the technology threat is, and whether recent orders support continued growth. Those questions are the agenda for the deeper research.

From the first pass to deeper research

When a company passes the first review, the next stage goes deeper into the areas the review flagged. That usually means reading every note to the accounts rather than the main ones, reading several years of reports to compare what management said with what happened, looking closely at the two or three closest competitors, and, where questions remain, reading the company’s presentations and the questions analysts asked at results briefings.

Keep the deeper research focused. Its purpose is to answer the specific questions the first pass raised, not to gather everything that can be known. A list of three precise questions, answered with evidence, is worth more than fifty pages of general notes.

Keep a record of every review

File each review with its date, the price used and the questions it raised, even for companies you decided not to pursue. Over time, these records become a valuable resource. They show which companies you have already examined and why you passed on them, so you do not repeat the work. They let you revisit a company when its price or circumstances change, starting from your earlier findings rather than from scratch.

They also show how your own judgements have fared. Looking back at reviews from several years earlier, and comparing what you expected with what happened, is one of the best ways to learn which signals proved reliable and which did not.

Do not let the price lead

It is tempting to start a review because a share price has moved sharply, and then to look for reasons that confirm the move. The review order in this chapter deliberately puts price last. Understanding the business, its profitability, cash, resilience and use of capital first means the price is judged against a view formed from the evidence, rather than the evidence being read to fit the price.

That discipline does not guarantee good decisions. It does make it far more likely that each decision rests on a clear understanding of what is being bought, which is the purpose of reading the numbers in the first place.

Adapt the review to the industry

The review in this chapter suits most trading and manufacturing businesses. Some industries need different measures, and applying the standard ones without adjustment can mislead.

• Banks and insurers. Their balance sheets are their business: loans, deposits and investments. Measures such as the interest margin earned on lending, the quality of the loan book and the regulatory capital held matter more than free cash flow, which has little meaning for a bank.
• Retailers. Leases are a large part of their cost base, so the lease adjustments in Chapters 2 and 4 matter greatly. Sales growth from existing stores, often reported as like-for-like or comparable sales, separates genuine growth from growth bought by opening new stores.
• Miners and energy producers. Results swing with commodity prices, so judge them across the cycle. Production costs per unit, the size and life of reserves, and the capital needed to replace depleted resources are central.
• Property trusts. Rental income, occupancy, lease terms and the valuation of the properties replace many of the usual operating measures.

If a company’s industry uses specialised measures, learn what they mean before relying on the standard review. The company’s own reports usually explain the measures it uses, and comparing them with competitors’ reports shows which ones the industry treats as important.

Traps in a quick review

A first pass is quick by design, which brings its own risks:

• Taking the first explanation. Management commentary offers a reason for every movement. Note it, but check whether the numbers support it.
• Missing a change in the business. A large acquisition or disposal can make earlier years incomparable. Check the segment note for changes before comparing years.
• Using inconsistent figures. Mixing statutory and adjusted profit, or different treatments of leases, can produce trends that are artefacts of the data.
• Anchoring on the first number seen. If the review starts with a low P/E, every later finding tends to be read favourably. That is another reason to look at the price last.

When thirty minutes says stop

Sometimes the most valuable result of a first pass is a clear reason not to continue. Stop, or at least set the company aside, if you still cannot explain how it makes money after the first five minutes; if the auditor’s report contains a going-concern warning or a modified opinion; if operating cash flow has been negative for several years without a credible explanation; if large debts fall due soon with no clear plan to refinance them; or if the accounts are so heavily adjusted that the statutory and underlying figures tell completely different stories.

Setting a company aside is not a judgement that it is bad. It is a decision that the effort needed to understand it is not justified, given the many other companies that can be understood more easily. That discipline saves time and avoids the costly mistakes that tend to come from investing in businesses that were never properly understood.

Practise on businesses you already know

The review becomes quick only with practice. A good way to build that practice is to start with companies whose products or services you already understand, perhaps because you use them or work in their industry. Your existing knowledge lets you check whether the numbers tell a story that matches what you see, and to notice when they do not.

Work through two or three such reviews in full before relying on the method for companies you know less well. Compare your findings with the company’s own explanations and with competitors’ results. After a handful of reviews, the steps become familiar, the template fills quickly, and the thirty minutes become a realistic budget rather than an ambitious target.

Bring the guide’s measures together

Each chapter of this guide adds a set of measures, and the review draws on all of them. Grouped by the question they answer, they form a compact reference for any first pass:

• Is the business good? Margin trends over five years and across the cycle; return on invested capital compared with the cost of capital; evidence of pricing power when costs rose.
• Is the profit real? Operating cash flow compared with net profit; receivable and inventory days; the reconciliation between statutory and adjusted profit; the auditor’s key audit matters.
• Is it resilient? Quick and current ratios; net debt against earnings and free cash flow; the maturity profile, covenants and coverage under stress; provisions, guarantees and claims in the notes.
• Is capital used well? Returns on incremental capital; free cash flow per share; the share count over time; the price paid in buybacks and acquisitions.
• Is the price sensible? P/E on normal earnings; EV/EBIT; free cash flow yield; a range of DCF values; and what growth the current price already assumes.

No single measure answers any of these questions on its own. Taken together, and compared across years and with competitors, they turn a set of financial statements into a reasoned view of a business and its price, which is the purpose of reading the numbers.

Final takeaway

A good first-pass review turns financial statements into a few testable questions about quality, resilience, cash generation and price.

Use this guide to frame your questions. Full financial analysis, professional advice and the company’s primary disclosures remain essential.