How To Analyse A Stock With Less Than 10 Years Of Data?

*This is in partnership with BQ Prime BrandStudio

Data is at the heart of smart investing decisions and smart investors rigorously study a company’s stock by analysing at least a decade worth of data.

But every so often, a fairly new company brimming with potential enters the markets. Not wanting to let any prospective gem slip past their fingers, investors need to make quick decisions with perhaps just a few years of data available to them.

Doing so requires smart and detailed analysis of the company, the industry it operates in, its leadership, risk factors and a lot more—all of which we will cover in this article.

Is less than 10 years of data enough to analyse a stock?

Yes, it’s fully possible to do so. However, if you have the opportunity to access data or information for a longer period, you will certainly gain a deeper understanding of the stock.

Here are five factors to keep in mind as you analyse a company’s stock with less than 10 years of data:

1. Get qualitative research right

When doing qualitative research on the potential value of a stock, the first thing you should look at is the sector the company operates in. If it’s in a growth sector (like electric vehicles, renewable energy, e-commerce, digital payments, etc.), then the potential for upside is usually higher. If a company is trading at a fairly high price to earnings (P/E) ratio, it is likely to be in a high-growth sector. A platform like Groww, packed with deep insights, is a great choice for qualitative research on a huge number of companies. 

The next thing you should examine is if the company has an ‘unfair’ advantage in the market. No, this doesn’t mean unethical business practices, which would be a clear sign to avoid the scrip. What we are referring to is well managed operations, a market advantage thanks to being a pioneer, highly organised and cost-saving distribution network, patents, innovative research, and a highly-profitable business model, to name a few.

Next, you should look closely into the company’s leadership and board. A peek into earnings call transcripts and annual reports, besides of course the company website can give you a fair idea about the breadth and depth of its leadership, their experience, past history of success and so on. Reputation, networks the leaders are part of, and the influence they command often plays some role in determining business success. If a company leader has a historical record of success in earlier ventures and those companies are known for good governance too, that’s a green flag for potential returns in the long run—even if the company you are considering investing in is new to the market.

Lastly, you examine the ‘what ifs’ of the company. Risk factors must be studied—such as a potential change in business model, if new leadership comes in, etc. Good competition analysis can also set the stage to understand growth potential.

2. Get into revenue flow

A company’s revenue flow is a strong indicator of what its potential stock value could be. Here’s where you narrow in on financials. An annual report should give you valuable insights into the balance sheet, sources of income, cash flows, and expenses.

Here are some key points to examine:

The company needs to be running on its operations-based revenue. If most of its revenue comes from non-operational revenue sources (debt, personal funds, assets, etc.), that’s not a good sign.

While debt is an integral part of any growing company, a high debt-equity ratio in a company is a warning sign. An investing rule-of-thumb states that a company with a debt-equity ratio of less than one may be a better choice to invest in.

The next thing you need to look at is return on equity. Young companies with a RoE of more than 15 percent are promising options for investors.

3. Is the company investing in growth

This is all about the company’s ability to invest in its growth. Is the company generating enough cash to invest in growth or is the business model a very asset-light one in a sector where companies need to invest to grow. 

For example, if you have your eyes on an electric vehicles company’s stock, find out whether they’ve invested in R&D centres and their own production facilities, or are simply importing products and rebadging them. Companies that control the entire value chain are usually better choices for long term returns. 

4. Check out investors and future opportunities

Factors like investors and partnerships—whether potential or active—also play a role in investor decisions.

Take, for example, logistics company Delhivery, which listed recently. The company had marquee investors such as the SoftBank Group, Nexus Venture Partners, The Carlyle Group, CPP Investment Board, Tiger Global, etc. You usually see a bunch of marquee investors when they are all convinced about growth potential and the business model.

While companies don’t always publicly reveal prospective partnership or investment news before fruition, documents such as AGM minutes or investor calls can give you some hints. Experience will teach you to read between the lines, but do make sure that any investing decision on such subjective matters are within your risk parameters. 

These five factors should help you make informed decisions when it comes to investing in a young company. The more research you do, the better your decisions will be—but it is always worth remembering that returns in stock market investments are never guaranteed because success is never guaranteed. When you invest wisely and spread risks across multiple companies and take a long-term view, history tells us that more often than not you are likely to get better returns than from investing in fixed deposits and the like.