hi i'm jimmy so this video is a simple
investment research process that we can
use for almost any company in any
industry in any country it's a very
simple process that lets us get a good
understanding as to whether or not this
company is worth
putting on the maybe buy list before we
then try to come up with the fair value
and identify where we should buy it
before we can do that we should really
know a bit about the company this is
that process now
the process that i use the processes
that i'm going to share with you this
question actually came over on a private
investing community where i was asked to
identify a simple research process
because we're analyzing different stocks
together on that investing community and
they said can you give us sort of a
starting point how do you go about
researching a company so
this the rest of this video is that it
is my personal investment research
process to go through to see if
companies worth analyzing closer if you
want to join that investment community i
will leave a link in the description
below thanks and now let's jump over to
the actual video that i posted in the
private community hi i'm jimmy so thank
you for the great question and for those
who didn't see the question the question
basically asked can we develop a simple
due diligence process for analyzing a
stock
well here's the process i go through and
i'll tell you where you can get each of
those where you can find the information
for each of these steps
for me the number one place to start is
i like to start assuming i'm new to the
company the number one place i like to
start is the business section of the
annual report whatever the 10 most
recent 10k or if you're overseas uh 20f
whatever the annual report is should
have a business section that business
section will describe what the business
is about
if it's fairly old let's say it's three
quarters old the year is about to end
you can also search in the you can also
read the management discussion and
analysis
in those two sections either one really
work you probably don't need both but
you could in the name of thoroughness
well
those sections will describe in words in
a narrative what the business is all
about
and the key to this whole section is to
try to logic out do we think that this
business is going to do well in the next
five years next 10 years can we logic
out why this business will be around for
a long time
if you can't logic it out if you don't
get what they do eliminate the company
we're looking at any points across the
company off the list
but let's pretend that we get through
that section we say okay this is working
fairly well we like the company i
understand where they're going i
understand their business plan and i
think it's a good one now it's time to
look at the numbers for me i like to
start with the cash flow statement
once i get to the cash flow statement
first i take a quick look at the three
sections in the cash flow statement the
first section the top section there's
always three different sections in a
cash flow statement the top section is
going to be cash flow from operations
this is the most important section
in my opinion in nearly all of the all
of the reports
all of the three major financial
statements
the cash flow from operations tells you
exactly that how much cash the company
generated during the year during the
quarter during the past few years
depending on how many you're looking at
i start there then i look quickly at the
cash flow from investing which is the
section below that cash flow from
financing the section below that
basically you're trying to identify
what's happening with the cash
in trying to identify
the
trends of the cash you want to see is
the company going out and raising a lot
of money maybe they're paying off a
bunch of debt you're going to see it all
in the cash flow statement
so
assuming we like the trends that the
different numbers are on the cash flow
statement are giving us
i think that we can then decide whether
or not this is a company that we think
is producing enough cash that's making
it investable now for me i also like to
calculate usually it's not listed i like
to calculate free cash flow
simplest way to do it is take the cash
flow from operations top section the
bottom number of the top section
cash flow from operations model cap
minus capital expenditures
if we take cash flow from operation
subtract capital expenditures roughly
speaking that is free cash flow
look at the trend at that for that
number over the past few years
if there's any huge anomalies a big jump
up a big drop down
look into that particular year pull up
that annual report they will probably
explain
why that happened you might have even
come across that in the management
discussion and analysis if this is the
year that you're reading that report
after the cash flow statement i
personally like to go to the income
statement
on the income statement you're looking
at all the basic numbers revenue profit
uh profit margins uh revenue growth rate
profit growth rate
how are the numbers growing is the trend
heading in the right direction on the
income statement you probably also find
whether or not they're paying dividends
or do they have enough money to pay
those dividends are they earning enough
profit to cover those dividends
again assuming we get a we like what we
see on this statement now we head over
to the balance sheet
this one's a bit more nuanced because on
the balance sheet you're looking at
again the basic stuff assets versus
liabilities short-term assets for
short-term assets versus long-term
assets
but also
we really need a comparison point every
industry is a little bit different and
this is also a good time to go out and
find a couple competitors in the
industry if we were looking at verizon
you're going to want to look at att as
well
verizon and at t are good examples
because that industry the telecom
industry tends to have a ton of debt if
you compare the telecom industry to uh
something like the tech industry
the telecom industry is likely to look
obscene but compared to their own
industry it might not look as bad so at
that point once you're on the balance
sheet look to see do they have too much
debt do are they do they have how much
cash do they have uh on the current
balance sheet are they able to pay off
that debt
and then once we get to that point well
now we're comparing it to other
companies and what do those companies
numbers look like you can go back and
retrace for each of the companies if you
wanted to how their free cash flow
numbers how their profit growth and
their revenue growth looks then once you
do those i think looking at some basic
metrics like return on equity return on
assets things along those lines to
identify return on invested capitals
another good one
things like that can give you an idea of
how efficient the company is this is a
good behind-the-scenes look at how
management how efficient management
actually is but again we already have
competitors so compare those numbers to
competitors numbers
once we do that
well go this goes back to the fir the
other part of the question where do you
find this information best part about
all of this is you can get all of this
information on any company's investor
relations page
every public company is going to have a
investor relations page on their website
for me when i start a company especially
company i don't really know that well
first thing i do is google
whatever the company is microsoft
investor relations go to that page pull
down the most recent annual report put
on pull down the most recent quarterly
report oh yeah one other thing
for the cash flow statement and the
income statement i usually like to look
at annual numbers
i'm i'm a big picture guy i want to see
the trend over the past three four five
six years
on the
balance sheet you want the most recent
one if it was annual was three quarters
ago forget it's no good go with the most
recent quarterly number because the
balance sheet is the a single point in
time
all the other ones are the numbers
through time
so
i think that
once you have the basics of is the
business good are the numbers good the
final step is really to try to come up
with a fair value we do that a lot on
this channel on the private on this
investing community
if you have any questions about a
company throw it out to me and i'll see
if i can do a quick discounted cash flow
analysis or perhaps ebt ebitda depending
on the business
but your final step is okay
now you know i like this company is it
worth buying today
if so where do i buy it that's where the
fair value calculation comes in it very
well might be a great company that you
love but it's too high if it's too high
put it on your bucket list you've
already done the research updating the
research down the road is way faster
than the initial process do this for as
many companies as we can and we are
bound to find very very good companies
the goal just keep eliminating the bad
ones if i had to go through
20 companies the dollar 30 i have to go
through the 30 companies in the dow
jones industrial average and you said
jimmy go out and pick the best company
in the dial 30. the way i would do it is
the same way warren buffett talks about
doing it is start eliminating companies
look at the dollar 30 start crossing
companies off the list as you're reading
about it no don't like the business no
too much debt compared to competitors
just keep companies keep crossing
companies off the list when you get to
the end
in theory what you're left with is the
best of the dial 30. just keep
eliminating the bad ones what you're
left with is the good ones
hopefully that helps let me know if you
need any clarification
just reply to this comment and i will
get back to you with
either a quick comment or another more
in-depth video if it calls for it thank
you so much for the questions thank you
for being part of the community