How to Do Business and Industry Analysis?

• Top-down approach: Analyse the broader economy, industry, and then the company.
• Bottom-up approach: Assess individual businesses first, followed by their sectors and the broader economy.
• Sales growth: Review year-on-year sales growth as part of historical financial performance.
• Peer comparison: Compare a company with competitors in the same industry.
• Profit conversion: Check whether sales growth is translating into profits.
• Retained profits: Assess whether profits are being reinvested for expansion or distributed to shareholders.

You can choose either approach based on your investment preferences and goals. Both methods help you move from a broader or narrower view towards assessing individual businesses.

How does the top-down approach work?

The top-down approach starts with the broader economy. You then examine the relevant industry before narrowing your analysis to a specific company.

The process can be viewed as:

1. Analyse the economy: Assess the broader economic environment.
2. Examine the industry: Identify the industries performing strongly within that environment.
3. Evaluate the company: Study individual businesses operating in the selected industry.

This approach helps you narrow a broader set of shares by first understanding the economic and industry conditions affecting businesses.

How does the bottom-up approach work?

The bottom-up approach reverses this process. You begin by identifying businesses that you believe have the potential to grow, without first restricting your search to a particular industry.

The process can be viewed as:

1. Identify businesses: Look for companies with strong business models.
2. Analyse their sectors: Examine the industries in which these companies operate.
3. Consider the economy: Assess how the broader economic environment supports the businesses and sectors.

Unlike the top-down approach, the initial company selection is not restricted by industry or another broader factor.

• Year-on-year sales growth:

Year-on-year sales growth is part of a company's historical financial performance. Strong growth can indicate that a business has an advantage within its sector.

However, sales growth alone does not establish the overall quality of a stock. You should consider it alongside other financial and business indicators before forming an investment view.

• Performance compared with peers:

Comparing a company's performance with competitors in the same industry can provide additional context.

A company may be improving over time, but if other businesses in the same sector are performing better, its relative growth may be weaker than it initially appears.

• Conversion of sales growth into profit:

Another part of fundamental analysis is examining how efficiently a company converts sales growth into profits.

Higher sales do not necessarily result in higher profits. For example, if a company's expenses increase alongside its sales, the additional sales may not translate effectively into profit.

• Retained profit and shareholder value creation:

When a company earns a profit, it can make decisions about how to use those earnings. It may reinvest profits into future growth and expansion or distribute them to shareholders.

Companies that are comfortable within their industry and have a strong business edge may use their profits in ways that support shareholder value creation.

Business and industry analysis can help you assess a company beyond its individual stock performance. You can use the top-down approach to move from the economy to the industry and company, or the bottom-up approach to begin with individual businesses.

You can then examine year-on-year sales growth, peer performance, profit conversion, and retained profits to build a broader view of the business. These factors can support a more structured approach to investment analysis.