Finmazing

What are Porter’s Five Force? Porter’s Five Force is a model that identifies and analyses  five competitive forces that shape every industry. The Five Forces model is named after Harvard Business School professor, Michael E. Porter. It helps analyzing the level of competition within a certain industry.  It also helps determine an industry's weaknesses and strengths. Porter's model can be applied to any segment of the economy to understand the level of competition within the industry and enhance a company's long-term profitability. The collective strength of these forces determines the profit potential of an industry and thus its attractiveness.   Understanding Porter’s Five Forces Porter's five forces include three forces from 'horizontal' competition – competition rivalry, the threat of new entrants and the threat of substitute products or services – and two others from 'vertical' competition – the bargaining power  of suppliers and the bargaining pow...

What is Herfindahl-Hirschman Index (HHI)? HHI is a score that helps to measure market concentration and used to determine market competitiveness. HHI is named after economists Orris C. Herfindahl and Albert O. Hirschman. It is an economic concept widely applied in competition and antitrust law. A highly concentration industry is the one where only a few players dominate the industry by holding a huge market share, leading to a near-monopolistic industry. Conversely, low degree of concentration refers to near-perfect competition scenario where many companies hold small market share.   Why is HHI important to an investor? HHI helps to measure market concentration which in turns helps us to determine profitability is the industry. There is a direct relation between market concentration and profitability. Low concentration perfect market and in perfect market there is cut-throat competition. So, it is difficult for the firm to earn above average returns. High concentration indi...

  What is Piotroski Score? Piotroski score is a discrete score that helps investors to identify fundamentally strong companies by analyzing their financial statements. It is a number between 0 to 9 that reflects nine criteria used to determine strength of company’s financial position. It is used to determine the best value stocks, with nine being the best and zero being the worst.   Who was Piotroski? Piotroski, a professor of accounts as part of his understanding the valuation of stocks wanted to understand if fundamental analysis had a role in selecting stocks. He shortlisted stocks with which were in the top 20%. He used their balance sheets and income statements; he used metrics like quality of earnings, leverage, operating cash flow etc. Eventually, he shortlisted 9 parameters under the heads of profitability, leverage, and efficiency, which was called F-score or the Piotroski score.   Understanding the Nine Parameters of Piotroski Score? Profitability criteria inclu...

  What is a Moat? The dictionary meaning of moat is a deep, broad ditch filled with water that surrounds a castle historically to provide a preliminary line of defense. It was like a ‘safety arrangement’ built around the castle in ancient times. Moat serves to protect those inside the fortress and their riches from outsiders. The wider and deeper the moat, more protected is the castle. It acts as an obstruction for the attackers to get access to the castle. How can Moat help us in stock investing? Assume that the company in which you are willing to invest is a castle. Prosperous castles are always subjected to attackers which try to take away the riches of the castle. Attackers here refer to the competitors which force the company to lower its margins and profits. Moat helps to protect the castle from the attackers. Moat here refers to the competitive advantage that helps the company to protect its margins and profits. Why is Moat necessary for a company? Moat is a characterist...