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...

When it comes to investing in a company, solvency is a crucial aspect. It is necessary to determine company's ability to pay its debt obligations. Read on for a breakdown of what solvency ratios are, why are they important, various types of profitability ratio, and how to calculate them. What is Solvency Ratio? Solvency ratios are also known as leverage ratios which  helps us examine a company’s financial health. It helps us in determining whether a company has sufficient cash flow to manage the debt obligations that are due. Do not mix solvency ratios with liquidity ratios. They are totally different. Liquidity ratios determine the capability of a business to manage its short-term liabilities while the solvency ratios are used to measure a company’s ability to pay long-term debts.   Why are solvency ratios important? All the funds required to run the business are not acquired from owners. Many businesses take debt in form of bonds, debentures, and loan. In long term...

When it comes to investing in a company, liquidity is a crucial aspect. Liquidity ratio is an essential tool to determine liquidity position of a company. Read on for a breakdown of what liquidity ratios are, why are they important, various types of profitability ratio, how to calculate them and how to interpret liquidity ratios.   What are liquidity ratios? Liquidity ratios is a type of financial used to determine a debtor's ability to pay off current debt obligations without raising external capital. It is used to determine a company’s ability to pay its short-term debt obligations. The metric helps determine if a company can use its current, or liquid, assets to cover its current liabilities.   Why are liquidity ratios important? The liquidity ratio is a great ratio that quickly gauges the current financial health and well-being of a company. It can also give us a reflection of how well a company’s administration is managing working capital. It affects the cre...

What is a Profit and Loss Statement (P&L)? The profit and loss statement is a financial statement that summarizes the revenues and costs incurred during a specific period. The P&L statement is synonymous with the income statement. These records provide information about a company’s ability or inability to generate profit by increasing revenue, reducing cost or both.   Understanding how to analysis P&L Statement The P&L statement is one of the three financial statements every company issues quarterly and annually. It is often the most popular statement that investors analyses before investing in a company. But how should one analyze P&L statement? The book “Warren Buffet and Interpretation of Financial Statements” guides us how Warren analyzes P&L Statement to identify company with durable competitive advantage. Without further ado, here is a summary of the book   1) Revenue : Where money comes in The first line of P&L Statement tells us about total ...