Understanding analyst reports

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In the previous lesson, the focus was purely on a company’s annual report and its various sections. In addition to this, you also learnt how to decode and understand the report, as a potential investor. In this chapter, we’ll shift focus to the analyst report. We’ll break down the various sections contained within an analyst report and try to understand its nuances from the point of view of an investor.     

Analyst report: An overview

You need to know who stock analysts are before we get to the answer to the question ‘What are analyst reports?’ Basically, stock analysts are people who dedicate their time to learning about a company and its financials. They go through the company’s annual reports and regulatory filings, talk to the management of the company and even conduct industry analysis to determine a company’s worth from an investor’s point of view.

They compile all of this information in the form of a report, along with their predictions of the company’s future performance and its share price movements. 

So, what are analyst reports?

The report prepared and compiled by expert analysts is commonly known in the world of finance as an ‘analyst report.’ It almost always contains the analyst’s rating of the company. And based on the stock analyst’s insight into the company, it also generally offers a recommendation to either ‘buy’ or ‘sell’ the company’s stock.

Understanding analyst reports 

An analyst’s report on a company can be quite comprehensive. It is generally divided into multiple sections that analyse and talk about the various aspects of the company. Before we get into the specifics, here’s a word of caution. Since there’s no specific format for this report, its structure might vary from one analyst to the other. However, there are certain sections that are commonly found in almost all such reports. Let’s take a brief look at them. 

The company’s background

An analyst’s report first gives you a brief overview about the company. This section typically contains some background information such as the industry the company operates in, its primary business, the sub-brands that it owns, as well as the lineup of its products and services. As you might recall from the previous chapter, the information contained in this section is largely similar to the section about a company’s overview in an annual report. In this case, however, it’s from the analyst’s perspective. 

Key details of the company’s stock 

This section contains certain key details about the company’s stock such as the current market price (CMP), the stock’s 52-week highs and lows and its market capitalisation as on the date of publishing the report. It may also contain certain important financial values and ratios such as the book value of the shares, the price to earnings (PE) ratio and the dividend yield. You’ll find more information about some of these ratios in the glossary at the end of this module. 

Management information

The management information section briefly introduces you to the company’s key managerial personnel (KMP), who are responsible for the day-to-day operations of the company. This section usually contains the names of the managerial personnel, their designations and their qualifications.    

Industry data 

The analyst report also contains a section that briefly covers the industry that the company belongs to. Usually, it consists of both Indian and the global industry data such as the market share, sales figures and overall trends. To give you a deeper perspective, these reports may occasionally also contain data regarding comparisons with other related industries.  

Financial summary 

A major part of the analyst report is dedicated to providing you with a financial summary of the company. Since it deals with the financials, as an investor, you need to direct your focus to this section. 

Analyst reports are usually restricted to merely providing you with the earnings data of the company, such as its sales, profits and earnings per share (EPS), among other financial ratios. Generally, the earnings data of the company is compared with similar data from the previous years to give you a better perspective of how far the company has come.     

Opportunities & risks faced by the company

This section of the analyst report focuses primarily on the various opportunities and threats that the company faces. You’ll recall that there’s also a similar section in the annual report prepared by the company. While this section in both the annual and the analyst reports explore the same areas, the perspective differs.

In an annual report, you get to view the risks and opportunities from the company’s internal point of view. However, in an analyst report, this section gives you an outsider’s perspective. They may overlap to a large extent, but an analyst may be able to identify some risks or opportunities that the company may not have foreseen. Similarly, the converse may also be possible.

So, it’s a good idea to read both these reports to get a comprehensive view of the potential opportunities and threats that the company faces. 

Stock recommendations

As we’ve already mentioned at the start of this lesson, almost all analyst reports contain a section on stock recommendations. This segment basically rates the company’s stock and tells you whether you should ‘buy’, ‘sell’, or ‘hold’ the stock of the company. In addition to the stock recommendation, this section also carries with it the analyst’s expectations regarding the stock price targets, stop loss targets and the time frame for those targets. 

Investment rationale 

As an investor, this is probably the most important section for you in an analyst report. The segment on investment rationale seeks to explain the analyst’s reason for arriving at the stock recommendation mentioned above. It gives you a deeper insight into the thinking and analytical processes of the stock analyst. Since the techniques for analysis may differ from person to person, this section essentially justifies the analyst’s conclusion. 

That said, when it comes to making investment decisions, it is not a good idea to merely rely on an analyst report alone. This report should purely be used as a supplementary material. Always remember to perform adequate research on your own before deciding to invest in a company.  

Wrapping up

So far, we’ve seen how the company’s financials, its annual report and third-party reports can all give you a lot of information needed for investment analysis. However, take a little detour and think of this alternate scenario - What if all of this information didn’t really mean anything useful? What if they didn’t really tell you much about an asset and its future prospects?

There’s a theory that looks at this angle. And our next chapter introduces you to this hypothesis.

A quick recap

  • Stock analysts are people who dedicate their time to learning about a company and its financials.
  • They compile all of this information in the form of a report, along with their predictions of the company’s future performance and its share price movements.
  • An analyst’s report first gives you a brief overview about the company. This section typically contains some background information such as the industry the company operates in, its primary business, the sub-brands that it owns, as well as the lineup of its products and services.
  • The report also contains key details about the company’s stock such as the current market price (CMP), the stock’s 52-week highs and lows and its market capitalisation as on the date of publishing the report.
  • The management information section briefly introduces you to the company’s key managerial personnel (KMP), who are responsible for the day-to-day operations of the company.
  • The analyst report also contains a section that briefly covers the industry that the company belongs to.
  • A major part of the analyst report is dedicated to providing you with a financial summary of the company.
  • It also gives you the analyst’s take on the various opportunities and threats that the company faces. 
  • There’s a segment for stock recommendations, where the analyst rates the company’s stock and tells you whether you should ‘buy’, ‘sell’, or ‘hold’ the stock of the company.
  • This is followed by a segment on the investment rationale, which seeks to explain the analyst’s reason for arriving at the stock recommendation mentioned above.
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Comments (3)

Karthik

29 Nov 2020, 01:41 PM

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Deepak kumar

20 Nov 2020, 10:56 AM

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Deepak kumar

20 Nov 2020, 10:56 AM

To learn the fundamental of stock trading, of course it is one of the best platform.

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