by elmads

Introduction

Fundamental analysis is a method of understanding the business’ financial statement, its health, its competitors and the market where the business operates. In short, the business economics of the company.

In this digital and information age, understanding a specific business is not impossible anymore for a lay person as most publicly listed companies are required to share and disclose their financial reports to everyone. This makes analysing the underlying company of a stock easier and faster than before, we just need to access it via their corporate website.

In this blog, I’ll share to you one of the businesses I’ve owned since 2020. I’ll show you the most basic process I’ve underwent to understand the company at a superficial level. This helps me decide if the business has the potential for me to own it, or not, or is it one of those businesses that is too hard for me to understand.

Greggs Publicly Limited Company (Ticker Symbol: GRG)

Greggs’ PLC – How to Understand a Public Company From Scratch

• Step 1. Understanding what the business does.

We’ll need to access the corporate website of the business. This can be easily done by searching the name of the company through the the search engine of a web browser.

Greggs plc operates as a bakery food-on-the-go retailer in the United Kingdom. It offers a range of fresh and frozen bakery products, sandwiches, and drinks. The company sells products to franchise and wholesale partners for sale in their own outlets. It is also involved in the property holding, non-trading, and trustee businesses. The company operates approximately 2,200 shops and 375 franchise locations. Greggs plc was founded in 1939 and is headquartered in Newcastle upon Tyne, the United Kingdom.

After reading the basic information regarding the company, and you personally find it easy to understand, then you could move forward into looking in the company’s business model and financials via their reports.

• Step 2. Accessing the company’s Reports (Quarterly & Annual)

To be honest with you, all financial reports are just too long and too boring to read. Most of them are repeating words and thoughts which can be just summarized in a paragraph. What I do is I only focus on some portions of the reports which are the following.

https://corporate.greggs.co.uk/investors/results-centre

1.) Chairman of the board & CEO statements – This portion has a lot of juicy information directly from the top operators of the company. Let’s just say that some managements give insider information of what happened in the company, what is currently happening and what they think will happen moving forward. They give guidance, they tell what are the problems they are facing, their tactics & strategies, their investments, their financial performance and a lot of other things that impacts the company and its investors in the short, medium and long-term horizon.

2.) Business Model – This is a go to section for first time time researcher of a company. It is understanding its business model, in how they make money. Some financial reports even show the history of their company since they’ve started, which gives an overview how the company has improved through out the years, if not decades.

3.) Financial Review – This is usually reported by the Chief Financing Officer. This portion shows what has happened, currently happening and what they surmise will happen with the company based on their financial status and investments. The only difference with the CEO statement is that, with the CFO review, they only focus on the financial numbers and capital allocation of the company.

4.) The financial statements (Income Statement, Balance Sheet & Cash Flow Statement). This is the highlights.

These are the 4 things that I focus on first. Reading the other portions of the full report and statement are not mandatory, it is up to us if we want to read everything. If you actually want to read all of it, then by all means go ahead. You’ll be doing what only few individuals does, even including professional investors.

NOTE: The problem with the most recent financial statements is that they only show 2-3 years worth of financial data. This is where the hard-work comes into the picture, where we’ll need to access all previous financial statements, then record the previous financial numbers of the company. I prefer getting 10 years worth of data of the company. This is not mandatory but a personal choice.

Why do I take such a time consuming task? this is for me to see the quantitative aspect of the data, if the company has been improving overall and has been delivering their promises.

I’ve done this time consuming task for a year or two, but with the help of https://tikr.com/ I have been able to significantly reduce the number of hours in doing my research. 😁

TIKR is an investment tool and database where they have collected more than 15 years of financial data of different public companies around the world. They have their free access and trial version which you could try to see if their website and database will be of help to your investment journey. I personally am subscribed with tikr.com for more than a year now.

Greggs’ PLC – Understanding a Public Company from Scratch – MD&A & Financials & My Simple Investment Checklist

1.) Increasing Revenue/Operating Income & Net Income

Greggs’ Revenue, Operating Income & Net Income has been increasing since 2007, except for 2020 due to the pandemic induced lockdowns

✔️ Check Mark Here

2.) Maintained or Increasing Margins (Gross Margins, Profit Margins & Net Income Margins)

✔️ Check Mark Here

3.) Low or Manageable Debt Levels

Greggs’ Debt-to-Equity since 2019 has been below the 90% level.

✔️ Check Mark Here

4.) Has Good Liquidity Levels

Current ratio has been poor, but this improved in Fiscal year 2021.

Still somehow a check mark here due to its improvement in FY 2021.

5.) Generating Consistent Positive Free Cash Flow (better if increasing)

6.) Stable, High and/or Increasing ROE & ROIC

Gregg’s ROE has been on average at 15% above 2007-2022.

While its ROIC has been better averaging at 20% within the same time period.

Though the past doesn’t predict the future, it does somehow show the management’s capability to grow the business at a wonderful rate.

✔️ Check Mark Here

7.) Should be below my Fair Value Calculation

I do this via discounted cash flow. The more I understand the company and its business model, the more I’ll be able to make a forecast of its earnings based from the data I have collected and what I think would happen with the company in the future.

Remember, in doing a DCF, our plugged number projections should be based on the narrative we have for our own forecast of the business. As what like Professor Aswath Damodaran says.

“valuation that is not backed up by a story is both soulless and untrustworthy and that we remember stories better than spreadsheets.”

“in the hands of a skilled number cruncher, this bias can be hidden far better with numbers than with stories.”

Professor Aswath Damodaran, Narrative and Numbers: The Value of Stories in Business

I bought Greggs’ PLC in fiscal year 2020 as it hit my fair value buy price level. Since then, I have not yet been able to by some more shares of the company. My thesis for the company is still intact and my conviction is still strong.

Unfortunately, the current market price where Greggs PLC is trading is far away to my computed intrinsic value of the business.

I am still waiting for the right time to purchase more shares of the said company – only if my thesis for the company is still intact by the time another buying opportunity presents itself.

To Sum It Up

This is the process and approach I use when looking for opportunities to purchase wonderful companies at a favourable market price.

Below are the complete steps, where Greggs PLC has all checkmarks for steps 3-9 of my list.

• Step 1. Understanding what the business does.
• Step 2. Accessing the company’s Reports (Quarterly & Annual)
• Step 3.  Increasing Revenue/Operating Income & Net Income
• Step 4. Maintained or Increasing Margins (Gross Margins, Profit Margins & Net Income Margins)
• Step 5. Low or Manageable Debt Levels
• Step 6. Has Good Liquidity Levels
• Step 7.Generating Consistent Positive Free Cash Flow (better if increasing)
• Step 8. Stable, High and/or Increasing ROE & ROIC
• Step 9: Should be below my Fair Value Calculation

Incidentally, understanding the language of business is important if we want to understand how they make money. If coding is for humans to communicate and understand computer languages then accounting is the way for us to understand businesses.

As investors we only need to be able to read and understand the financial reports, as the numbers tell us stories about the company and its businesses. We don’t need to have a degree in accounting just to be able to read financial statements. Same as with learning how to code, both are skills that can be learned even without a degree.

If you want to learn the basics on how to read financial statements, I highly suggest for you to read this easy to understand book.

It is one of the uncomplicated books to read which tackles interpreting financial statements and how to understand the numbers in an investor’s point of view.

As like what the Oracle of Omaha has said;

“You have to understand accounting and you have to understand the nuances of accounting. It’s the language of business and it’s an imperfect language, but unless you are willing to put in the effort to learn accounting – how to read and interpret financial statements – you really shouldn’t select stocks yourself”

Warren Buffett

Knowledge is my Sword and Patience is my Shield,

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.