Company Analysis: Past and Present

Learning Objectives Coverage

LO1: Describe the elements that should be covered in a thorough company research report

Core Concept

A company research report is a comprehensive document that analyzes a company’s financial performance, business model, competitive position, and provides valuation estimates with investment recommendations. Research reports enable investors to make informed decisions about securities based on systematic analysis rather than speculation. The key components are business model analysis, financial statement analysis, industry positioning, valuation models, risk assessment, and investment recommendations.

Formulas & Calculations

• Report structure framework:
  • Initial reports: Business model + Industry analysis + Financial models + Valuation + ESG + Risks
  • Subsequent reports: Updates + New information analysis + Revised valuation
• HP 12C steps: Not applicable for qualitative framework
• Common variations: Sell-side vs buy-side reports, equity vs credit research formats

Practical Examples

• Traditional Finance Example: An analyst covering Apple Inc. would include product line analysis, iPhone sales trends, services revenue growth, competitive positioning vs Samsung/Google, financial projections, DCF valuation, and buy/hold/sell recommendation
• Calculation walkthrough: Not applicable for qualitative framework
• Interpretation: Initial reports provide comprehensive coverage for new investors; subsequent reports focus on earnings updates and recommendation changes

DeFi Application defi-application

Research reports for Uniswap would analyze TVL trends, trading volume, fee generation, tokenomics, competitive position vs. other DEXs, and smart contract risks. On-chain analytics replace traditional financial statements, with protocol revenue and TVL serving as analogs to revenue and assets under management. The advantage is real-time transparent data, but the complexity of smart contract analysis and the rapidly evolving competitive landscape introduce challenges not found in traditional equity research.

LO2: Determine a company’s business model

Core Concept

A business model describes how a company creates, delivers, and captures value through its products, services, customers, pricing, channels, and resources. Understanding the business model is foundational for analyzing revenue drivers, cost structure, and competitive advantages. The Business Model Canvas framework identifies nine building blocks: value proposition, customer segments, channels, customer relationships, revenue streams, key resources, key activities, key partnerships, and cost structure.

Formulas & Calculations

• Business Model Canvas:
  • Revenue = Volume × Price × Product Mix
  • Customer Lifetime Value = Revenue per customer × Retention period - Acquisition cost
• HP 12C steps: For CLV calculation: [Revenue] [ENTER] [Retention] [×] [Acquisition cost] [-]
• Common variations: B2B vs B2C models, subscription vs transaction models, platform vs linear models

Practical Examples

• Traditional Finance Example: Amazon’s business model combines e-commerce retail (B2C), marketplace platform (connecting third-party sellers), cloud services (AWS B2B), and subscription services (Prime)
• Calculation walkthrough: If Amazon Prime has 200M subscribers at $139/yearwith90$139 = $27.8B
• Interpretation: Multi-sided platform models create network effects where value increases with more participants

DeFi Application defi-application

• Protocol example: Aave’s business model: lending protocol earning from interest rate spreads, flash loan fees, and liquidation penalties
• Implementation: Smart contracts automate the value capture through programmatic fee collection
• Advantages/Challenges: Transparent fee structures and automated execution vs dependency on liquidity providers and smart contract risks

LO3: Evaluate a company’s revenue and revenue drivers, including pricing power

Core Concept exam-focus

Revenue drivers are the key factors that determine a company’s top-line growth, including volume, price, mix, and market share. Pricing power reflects the ability to raise prices without losing customers — a key indicator of competitive advantage. Revenue analysis reveals growth sustainability, competitive position, and market dynamics, and forms the foundation for financial forecasting.

Formulas & Calculations

• Revenue decomposition: Revenue = Σ(Volume_i × Price_i) for all products i
• Market share: Company Revenue / Total Addressable Market
• Price elasticity: % Change in Volume / % Change in Price
• HP 12C steps: [Volume] [ENTER] [Price] [×] for basic revenue calculation
• Common variations: Bottom-up (product-level) vs top-down (market-level) analysis

Practical Examples

• Traditional Finance Example: Netflix revenue drivers: Subscriber count × Average Revenue Per User (ARPU) × Retention rate. With 230M subscribers at $15/monthaverage:Annualrevenue=230M\times$15 × 12 = $41.4B
• Calculation walkthrough: If Netflix raises prices 10% and loses 2% of subscribers: New revenue = 230M × 0.98 × $16.50\times 12=$44.7B (8% increase)
• Interpretation: Strong pricing power indicated by revenue growth despite subscriber loss

DeFi Application defi-application

Uniswap V3 revenue drivers decompose into trading volume multiplied by fee tiers (0.05%, 0.30%, 1.00%) and the LP share of fees. Dynamic fee adjustment based on pair volatility and concentrated liquidity positions increase capital efficiency. While on-chain metrics provide full transparency, fee compression from competitive pressure and MEV extraction erode protocol revenue — analogous to margin pressure in traditional industries.

LO4: Evaluate a company’s operating profitability and working capital using key measures

Core Concept exam-focus formula

Operating profitability measures how efficiently a company converts revenue into operating profit, while working capital management reflects efficiency in managing short-term assets and liabilities. Together, profitability and working capital efficiency determine cash generation ability and financial health — critical inputs for forecasting and valuation. Key metrics include gross margin, operating margin, EBITDA margin, inventory turnover, receivables collection, payables management, and the cash conversion cycle.

Formulas & Calculations

• Gross Margin: (Revenue - COGS) / Revenue × 100%
• Operating Margin: Operating Income / Revenue × 100%
• EBITDA Margin: EBITDA / Revenue × 100%
• Cash Conversion Cycle: DSO + DOH - DPO
• HP 12C steps: For margins: [Revenue] [ENTER] [COGS] [-] [Revenue] [÷] [100] [×]
• Common variations: Industry-specific adjustments, segment-level analysis

Practical Examples

• Traditional Finance Example: Apple’s operating metrics: Gross margin 43%, Operating margin 30%, CCC = 50 days (DSO) + 8 days (DOH) - 95 days (DPO) = -37 days (negative working capital)
• Calculation walkthrough: Revenue $365B,COGS$208B: Gross margin = (365-208)/365 = 43%
• Interpretation: Negative CCC means Apple finances operations through supplier credit

DeFi Application defi-application

MakerDAO’s profitability can be analyzed using traditional metrics: stability fees from DAI loans serve as revenue, while oracle costs and development grants represent operating expenses. On-chain revenue tracking through fee accrual provides real-time profitability data, and instant settlement means minimal working capital is needed — the cash conversion cycle is effectively zero. The challenge lies in volatile crypto collateral affecting bad debt provisions, a risk unique to DeFi lending protocols.

LO5: Evaluate a company’s capital investments and capital structure

Core Concept exam-focus

Capital investments include expenditures on long-term assets (PP&E, intangibles, acquisitions), while capital structure is the mix of debt and equity financing (covered further in Corporate Issuers). Capital allocation decisions and financing choices determine returns on invested capital and financial risk. Key metrics include CapEx intensity, ROIC, asset turnover, debt/equity ratio, interest coverage, and credit ratings.

Formulas & Calculations

• ROIC: NOPAT / Invested Capital
• WACC: (E/V × Re) + (D/V × Rd × (1-Tax))
• Degree of Financial Leverage: % Δ Net Income / % Δ Operating Income
• HP 12C steps: For WACC: [Equity weight] [ENTER] [Cost of equity] [×] [Debt weight] [ENTER] [After-tax cost of debt] [×] [+]
• Common variations: Economic profit (ROIC - WACC), EVA calculations

Practical Examples

• Traditional Finance Example: Microsoft capital structure: Market cap $2.5T,Debt$80B, WACC ≈ 9%. Annual CapEx $23B focused on cloud infrastructure. ROIC 25% > WACC indicates value creation
• Calculation walkthrough: WACC = (2.5T/2.58T × 10%) + (80B/2.58T × 3% × 0.75) = 9.7%
• Interpretation: Low leverage preserves financial flexibility for acquisitions and R&D investments

DeFi Application defi-application

Compound Finance deploys capital through protocol reserves, insurance funds, and development grants from its treasury. DAO governance votes on capital allocation, replacing the traditional board of directors. With no conventional debt structure, the protocol avoids leverage risk but faces coordination challenges and voter apathy — a DeFi governance problem that mirrors low shareholder engagement in traditional equity securities.

Core Concepts Summary (80/20 Principle)

Must-Know Concepts

1. Business Model Canvas: Framework identifying how companies create and capture value
2. Revenue Driver Analysis: Breaking down revenue into volume, price, and mix components
3. Operating Leverage: Proportion of fixed vs variable costs affecting profit sensitivity
4. Working Capital Management: Efficiency in managing receivables, inventory, and payables
5. ROIC vs WACC: Value creation occurs when returns exceed cost of capital

Quick Reference Table

Concept	Formula	When to Use	DeFi Equivalent
Gross Margin	(Revenue - COGS) / Revenue	Profitability analysis	Protocol revenue - Gas costs
Cash Conversion Cycle	DSO + DOH - DPO	Working capital efficiency	Not applicable (instant settlement)
ROIC	NOPAT / Invested Capital	Capital efficiency	Protocol revenue / TVL
Market Share	Company Revenue / TAM	Competitive position	Protocol TVL / Total DeFi TVL
DOL	% Δ Operating Income / % Δ Sales	Risk assessment	Protocol fee sensitivity

Comprehensive Formula Sheet formula

Essential Formulas

Revenue Decomposition:
Revenue = Σ(Volume × Price × Mix)
Bottom-up: Product-level aggregation
Top-down: Market size × Market share

Profitability Cascade:
Gross Profit = Revenue - COGS
EBITDA = Gross Profit - Operating Expenses
EBIT = EBITDA - D&A
Net Income = EBIT - Interest - Taxes

Working Capital Metrics:
DSO = (Accounts Receivable / Revenue) × 365
DOH = (Inventory / COGS) × 365
DPO = (Accounts Payable / COGS) × 365
CCC = DSO + DOH - DPO
NWC = Current Assets - Current Liabilities

Leverage Measures:
DOL = % Δ Operating Income / % Δ Sales
DFL = % Δ Net Income / % Δ Operating Income
DTL = DOL × DFL

Return Metrics:
ROE = Net Income / Equity
ROE = Net Margin × Asset Turnover × Equity Multiplier
ROIC = NOPAT / (Debt + Equity - Cash)

HP 12C Calculator Sequences

Gross Margin Calculation:
[Revenue] [ENTER]
[COGS] [-]
[Revenue] [÷]
[100] [×]

WACC Calculation:
[Equity Market Value] [ENTER]
[Total Capital] [÷]
[Cost of Equity] [×]
[Debt Market Value] [ENTER]
[Total Capital] [÷]
[Cost of Debt] [×]
[1] [ENTER] [Tax Rate] [-] [×]
[+]

Cash Conversion Cycle:
[AR] [ENTER] [365] [×] [Revenue] [÷]  (DSO)
[Inventory] [ENTER] [365] [×] [COGS] [÷]  (DOH)
[+]
[AP] [ENTER] [365] [×] [COGS] [÷]  (DPO)
[-]

Practice Problems

Basic Level (Understanding)

1. Problem: TechCo has revenue of $100M,COGSof$60M, and operating expenses of $25M. Calculate gross margin and operating margin.

   • Given: Revenue = $100M,COGS=$60M, OpEx = $25M
   • Find: Gross margin % and Operating margin %
   • Solution:
     • Gross Profit = $100M-$60M = $40M
     • Gross Margin = $40M/$100M = 40%
     • Operating Income = $40M-$25M = $15M
     • Operating Margin = $15M/$100M = 15%
   • Answer: Gross margin 40%, Operating margin 15%

2. Problem: RetailCo has DSO of 30 days, DOH of 60 days, and DPO of 45 days. Calculate the cash conversion cycle.

   • Given: DSO = 30, DOH = 60, DPO = 45
   • Find: Cash conversion cycle
   • Solution: CCC = 30 + 60 - 45 = 45 days
   • Answer: 45 days from cash outflow to cash inflow

Intermediate Level (Application)

1. Problem: StreamCo has 50M subscribers paying $10/monthwith5$12. Historical data shows 10% price increase leads to 2% subscriber loss. Calculate revenue impact.

   • Given: 50M subscribers, $10/month,5$12
   • Find: Revenue change from price increase
   • Solution:
     • Current annual revenue = 50M × $10\times 12=$6,000M
     • After price increase: Subscribers = 50M × 0.96 = 48M
     • New annual revenue = 48M × $12\times 12=$6,912M
     • Revenue increase = $912M or 15.2%
   • Answer: Revenue increases by $912M (15.2%) demonstrating pricing power

2. Problem: ManufactureCo has fixed costs of $10Mandvariablecostsof$50 per unit. Selling price is $100 per unit. Calculate DOL at 300,000 units.

   • Given: FC = $10M,VC=$50/unit, Price = $100/unit, Q = 300,000
   • Find: Degree of operating leverage
   • Solution:
     • Contribution Margin = ($100-$50) × 300,000 = $15M
     • Operating Income = $15M-$10M = $5M
     • DOL = Contribution Margin / Operating Income = $15M/$5M = 3.0
   • Answer: DOL = 3.0, meaning 1% sales change causes 3% operating income change

Advanced Level (Analysis)

1. Problem: E-CommerceCo analysis: Revenue $500Mgrowing20$50M (5% of revenue) and maintains this ratio. Evaluate whether the company creates value and calculate ROIC.
   • Given: Complex multi-metric scenario
   • Find: ROIC and value creation assessment
   • Solution:
     • Operating Income = $500M\times 5$25M
     • NOPAT = $25M\times (1-0.25)=$18.75M
     • Fixed Assets (assumed) = $500M\times 40$200M
     • Working Capital = -$50M
     • Invested Capital = $200M-$50M = $150M
     • ROIC = $18.75M/$150M = 12.5%
     • Since ROIC (12.5%) > WACC (12%), company creates value
   • Answer: ROIC = 12.5%, creating value with 50bp spread over WACC

DeFi Applications & Real-World Examples

Traditional Finance Context

• Walmart Business Model: Everyday low prices through operational efficiency, negative working capital from supplier financing, high inventory turnover
• Apple’s Pricing Power: Premium pricing sustained through brand loyalty, ecosystem lock-in, demonstrated by maintaining margins despite competition
• Amazon’s Capital Allocation: Heavy reinvestment in fulfillment centers and AWS infrastructure, accepting lower current margins for future market dominance

DeFi Parallels

• Uniswap V3 Analysis:

  • Revenue drivers: Daily volume $1-3B\times averagefee0.25$2.5-7.5M daily revenue
  • Capital efficiency: Concentrated liquidity positions increase capital turnover
  • No working capital needs due to atomic swaps

• Aave Protocol Metrics:

  • Business model: Lending protocol earning interest spread and flash loan fees
  • Key metrics: Utilization rate, total borrowed/supplied, liquidation efficiency
  • Risk management through dynamic interest rates and overcollateralization

• MakerDAO Profitability:

  • Revenue: Stability fees from DAI generation (typically 0.5-8% APR)
  • Costs: Oracle operations, development grants, risk management
  • Capital structure: No traditional debt, protocol surplus acts as retained earnings

Case Studies

1. Compound Finance Treasury Management:

   • Background: $500M+ in COMP tokens in treasury
   • Analysis: Balancing development funding vs token dilution
   • Outcomes: Implemented streaming payments and vesting schedules
   • Lessons: Importance of sustainable tokenomics and treasury diversification

2. Curve Wars Capital Allocation:

   • Background: Protocols competing for CRV emissions through vote-locking
   • Analysis: ROI on bribes vs direct liquidity provision
   • Outcomes: Convex capturing >50% of veCRV voting power
   • Lessons: Capital efficiency through protocol composability and alignment

Common Pitfalls & Exam Tips

Frequent Mistakes

• Mistake 1: Confusing gross margin with contribution margin - gross margin includes all COGS, contribution margin only variable costs
• Mistake 2: Using book values instead of market values for WACC calculations
• Mistake 3: Ignoring working capital changes when evaluating cash generation
• Mistake 4: Comparing margins across industries without considering business models

Exam Strategy

• Time management: 90 seconds per question average; skip complex calculations initially
• Question patterns: Watch for DOL/DFL combinations, working capital efficiency metrics
• Quick checks: Verify margin cascade (Gross > Operating > Net), ensure CCC components have correct signs

Key Takeaways

Essential Points

✓ Company research reports must cover business model, financials, industry position, valuation, and risks ✓ Revenue analysis requires both bottom-up (product level) and top-down (market level) approaches ✓ Operating leverage amplifies profit volatility; higher fixed costs mean higher risk and potential return ✓ Negative working capital (like Amazon, Dell) provides free financing from suppliers ✓ Value creation requires ROIC > WACC consistently over time

Memory Aids

• Business Model Canvas: 9 building blocks - “CVP-CR-KKK-R” (Channels, Value Prop, Partners, Customer Relations, Revenue, Key activities/resources/partners)
• DuPont Formula: “NAM” - Net margin × Asset turnover × Multiplier = ROE
• Working Capital: “DIPs in Cash” - DSO + Inventory - DPO = CCC

Cross-References & Additional Resources

Related Topics

• Prerequisite: Financial Statement Analysis
• Related: Industry and Competitive Analysis (Porter’s Five Forces, competitive positioning)
• Next topic: Industry and Competitive Analysis
• Advanced: Equity Valuation (DCF, multiples, option pricing for growth companies)

Source Materials

• Primary Reading: Finance Certification 1 Volume 5, Chapter 5
• Key Sections: Business model frameworks, profitability analysis, working capital management
• Practice Questions: End-of-chapter problems focusing on margin calculations and leverage measures

External Resources

• Videos: “Understanding Business Models” - Strategyzer YouTube channel
• Articles: McKinsey Quarterly on “The Eight Essentials of Innovation”
• Tools: Morningstar Direct for historical financials, CapitalIQ for peer analysis

Review Checklist

Before moving on, ensure you can:

• List all required elements of an initial company research report
• Analyze a business model using the 9-block canvas framework
• Decompose revenue into volume, price, and mix drivers
• Calculate and interpret gross, operating, and EBITDA margins
• Compute cash conversion cycle and explain implications
• Evaluate capital efficiency using ROIC vs WACC framework
• Apply DOL and DFL to assess operating and financial risk
• Compare traditional finance metrics with DeFi protocol equivalents