Chapter 08 / 8
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.
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
| Question | Notes to capture |
|---|---|
| Business model | How it earns money and who pays |
| Competitive position | Evidence for advantage; key threats |
| Profitability | Revenue and margin trends |
| Cash conversion | Operating cash flow versus profit |
| Reinvestment | Maintenance capex, growth capex and returns |
| Financial risk | Liquidity, borrowing and debt maturities |
| Valuation | Price, earnings, cash-flow assumptions |
| Confidence | Unknowns, red flags, follow-up research |
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.
Final takeaway
A good first-pass review turns financial statements into a few testable questions about quality, resilience, cash generation and price.
