The company research report and the business model

Where does company analysis fit?

It is the first of three stages. An analyst studies the company’s business model and its past and present results, then the industry and the company’s competitive position, and only then forecasts and values it.

Company researchthree stages, always in this order

• 1. Company analysis: past and present Memorize the subject of this module
  • Business model Memorize what the company is
  • Revenue and its drivers Use it where sales come from
  • Operating profitability and working capital Use it what it keeps and ties up
  • Capital investments and capital structure Use it how the money is used and raised
• 2. Industry and competitive analysis Memorize structure, outside forces, competitive position
• 3. Forecasting, then valuation Memorize only after stages 1 and 2

The stages exist because each one limits the next. A forecast of revenue is only as good as the understanding of what drives revenue today (stage 1) and of how competition might change it (stage 2).

The forecast itself lives in a financial model : a quantitative statement of the analyst’s views about revenue, costs and capital. It is not a math problem with one right answer, so every assumption needs evidence from the first two stages.

What does a company research report contain?

Use it

A company research report is how an analyst presents the analysis, the valuation and the investment recommendation. What it looks like depends on who will read it. A broker covering a listed company for its clients (sell-side research) opens with one long report and then publishes shorter ones whenever there is news, most often after results. A note for an investment team that already knows the business can be a page or a short slide deck.

The long first report is the initiation report (initiating coverage). Its main readers are people who do not yet know the company, so it explains everything.

Initiation reportwritten for readers new to the company

• Front matter Use it identifiers, recommendation, target price, disclosures
• Recommendation Use it the call and the key reasons
• Company description Use it business model, strategy, revenue and profit breakdowns
• Industry overview and competitive position Use it
  • Industry size, growth, profitability history and outlook
  • Competitive analysis Porter's Five Forces
  • External influences PESTLE (political, economic, social, technological, legal, and environmental)
  • Company's position and strategy versus rivals
• Financial analysis and model Use it drivers, forecasts, statements
• Valuation Use it target price, key inputs, scenarios
• ESG considerations Use it ownership, management, executive pay
• Risks Use it material downside and upside

Later, shorter reports, usually written after the company reports results, are each an update report . Their readers already know the company, so they cover only what is new.

Element	Initiation report	Update report
Front matter (identifiers, recommendation, target price, disclosures)	yes	yes
Recommendation and key reasons	yes	yes, with what changed
Company description and business model	yes, in depth	rarely
Industry overview, Five Forces, PESTLE (political, economic, social, technological, legal, and environmental factors), competitive position	yes	rarely (they change slowly)
Financial analysis and model, forecasts	yes	updated: actual vs expected results
Valuation with target price, scenarios	yes	changes since the last report
ESG, ownership, management, pay	yes	if relevant
Risks (downside and upside)	yes	updated

Exam tip Two elements are in every report: the recommendation with its target price, and the risks. An initiation adds the business model, the industry analysis and the detailed financial model.

How do you determine a business model?

A business model describes how a company makes money. Five questions pin it down, and each has a standard answer in the report’s company description.

Element	Question	Lumen Ledger (our case)
Product or service	What is sold?	cloud accounting software, plus a payroll add-on
Customers	To whom?	small firms with 1 to 50 staff; no customer above 1% of revenue
Sales channels	How are customers reached and served?	online sign-up, and partner accountants who recommend it
Pricing	How much, and how is it paid?	monthly subscription tiered by features; annual plans at a discount
Key resources and partners	What does it rely on?	engineers, a cloud hosting provider, bank data feeds

Business modelhow the company makes money

• Product or service Memorize what is sold?
• Customers Memorize to whom?
• Sales channels Memorize how are customers reached and served?
• Pricing and payment Memorize how much, on what terms?
• Resources, suppliers and partners Memorize what does it buy and rely on?

Each answer leads to sharper questions. Would losing one customer hurt? Could a key supplier be swapped out next month? Does the company own its route to customers, or rent it from someone else? The five questions travel from company to company; only the answers change.

Many companies follow a conventional business model , such as a retailer or a mining company. Then the analyst does not describe everything from scratch. The effort goes into where this company differs from the usual model or from its rivals.

Where does the information come from?

The analyst gathers evidence from several kinds of information sources , grouped by who produces them. Sources closer to the issuer are free and detailed but written by the company; sources further away are independent but may be paid for or less specific.

Sources for the business modelgrouped by who produces them

• The issuer Use it free if the company is public
  • Filings annual and quarterly reports
  • Earnings calls and investor events plus press releases
  • Management and investor relations also site visits and the product itself
• Public third parties Use it
  • Industry white papers and government data economic and industry indicators
  • News and social media general and industry-specific
• Proprietary third parties Use it
  • Sell-side and rating agency research paid or restricted
  • Data platforms and consultancies often industry specific
• The analyst's own research Use it
  • Surveys, customer conversations, product tests commissioned or done directly

Using several kinds together is what makes an analysis reliable. Filings give the numbers, a customer survey tests the story management tells, and a rival’s product shows what the company is up against.

Go deeper Sell-side and buy-side reports

A sell-side analyst works for a broker or bank and publishes reports for outside clients, so the initiation format above is built for a wide audience that must be introduced to the company. A buy-side analyst works for an asset manager or fund and writes for the people who decide what to buy, often as short internal memos, slides or conversations. The framework and the evidence are identical; the length and the audience are not. On the exam, “internal note for a familiar audience” points to a short report.

Go deeper Why trying the product is a real edge

Using a company’s product, and its competitors’ products, gives the analyst a view that filings cannot: how easy sign-up is, where the experience is weak, what a customer would switch for. It is not always possible (a drug, a jet engine), which is why it is listed as a source rather than a requirement. When it is possible, it is the cheapest way to test the claims in the business model description.