How do I conduct better analysis?
I am an analyst at a private credit firm, with one year of BB commercial credit experience prior to this. Today I had a conversation with my manager, and he said he wants me to start digging deeper in my analysis and to start "thinking like an investor".
My problem is most of my analysis is regurgitating financials. Anyone can do it. I don't seem to dive in deep enough to understand the company, industry, etc. I think what troubles me is when I get started with a new company to cover, I don't seem to know where to start. I am by no means an expert at an industry. For example, today I got added to cover a bio tech company. I don't know where to find relevant info about the industry, or what to start looking for.
Could anyone share some advice as to how I can start improving my analysis from just being financials focused? Any tips, things to think about, or items that I should address as soon as I start covering a new company/industry?
Are resources like Seeking Alpha a good place to start if I wanted to learn about a company or industry that I start covering? Are there any other resources someone could recommend?
Thanks
To elevate your analysis and truly "think like an investor," here’s a structured approach based on the most helpful WSO content:
Start with Company Fundamentals:
Understand the Industry:
Leverage External Resources:
Develop an Investor Mindset:
Broaden Your Perspective:
Practical Tips for Starting Analysis:
By following these steps, you’ll move beyond regurgitating financials and start delivering deeper, more insightful analysis. For additional guidance, check out the following WSO threads: - "Finishing 1st Year as HF Analyst - Ask Anything" (url: https://www.wallstreetoasis.com/forum/hedge-fund/finishing-1st-year-as-…) - "Q&A: HF Analyst @ $5bn+ Fund - Breaking In and Transition to Risk-Taking Role" (url: https://www.wallstreetoasis.com/forum/hedge-fund/qa-hf-analyst-5bn-fund…) - "Equity Research Q&A with Flake" (url: https://www.wallstreetoasis.com/forum/equity-research/equity-research-q…)
These resources provide actionable advice and insights from experienced professionals.
Sources: Guide To Evaluate a Biotech Company, Finishing 1st Year as HF Analyst - Ask Anything, Q&A: HF Analyst @ $5bn+ Fund - Breaking In and Transition to Risk-Taking Role, Learning Curve as 2nd Year Analyst, Finishing 1st Year as HF Analyst - Ask Anything
Read the earnings call transcripts.
The bot response is actually fairly good. Assuming you're literally only getting financials for the prospective borrower (which don't include any management discussion & analysis / narrative), then a few thoughts come to mind: (1) check the company website and Google to see what you can find out about the company's products, has management spoken anywhere publicly about the business, are there any lawsuits which would impact the business and your ability to get repaid as a lender (example for biotech - does the company have any drug trials which need regulatory approvals to continue, but regulators have not given yet, or affirmatively denied, such approval - if approval is denied, does that impact revenue - is revenue impacted enough to leave insufficient cashflow to repay your loan - etc); (2) try to find comparable public companies, and read a few 10-Ks - are there similarities in how companies talk about their business? Are there differences? It's all a game of pattern-recognition, and the more examples you have to compare to, the better (learning about a new sector is always toughest for the first company you're looking at, but the process should speed up for subsequent companies because you already have a knowledge base); (3) compare margins across comparable companies and the target as a proxy for answering the question 'do these companies all have similar business models?' You can compare financials across industries to get a sense for what different business models look like; (4) Google for industry news sources, and subscribe to those sources or use Google alert keywords; (5) think about what you learned about the company in (1) relative to the rest of these items... e.g., for a biotech company - what are its products, are any drugs under patent / what is the remaining period of patent protection, do any products still need regulatory approvals and if so, what does the company's future results look like if it does and does not get those approvals. And take notes for the future, so if you have to come back to an industry you haven't covered for a while, you can refresh quickly - this also applies to your personal research process... if you're struggling with how to get started or what to look for, create a Word doc with a list, and build / revise it over time. Look for X; try checking Y; etc.
There is a theme here - just start reading. And take what information you do have, no matter how little, and work from there - biotech, Google, off to the races. There is often no silver bullet source, just pulling together insights from various places. Also, because you're in credit, the name of the game is 'don't lose money.' So thinking about what can go wrong with the business can help you underwrite for potential downside... google for the industry plus bankruptcy as one way to learn what has historically happened to businesses in the sector when something goes wrong (and what can go wrong). Googling "biotech bankruptcy," the first result I get is an article about all the biotech bankruptcy filings in 2023 from a site called "Fierce Biotech," which appears to be an industry news source.
Instead of jumping into the financials as soon as you are given a name, take a step back and first try to understand what the business does, the key drivers, how the business has been doing, and what the outlook is (what your thought is, how is the market viewing it, etc.). That will help you put the financials into perspective. I think a lot of this just comes with reps.. you will get better at it the longer you do it.
Rookie / dumb question but any books / resources to provide frameworks for this? I know this is simple and often guided differently from industry to industry but wondering if you have any recommendations
I would say work backwards. Start by building out your credit thesis instead of analyzing the financials that were provided to you. From there, request for information that you need to confirm your thesis.
Agree with others you get better with reps but there are some usual suspects. Customer concentration, recurring profits, contractual nature of the business, industry backdrop, market share, etc
Financials are really more of a red flag/green flag exercise than anything else, you should not be spending the bulk of your time on that. You need to develop a credit investing mindset which in my mind has 2 parts:
1. How do I get paid/exit? How is the business generating cash to pay your loan back? Cash flow? Asset Collateral? TEV? If you need to sell how confident in your downside TEV? This should be a key driver of your thesis (e.g. low LTV, stable cash flow generation, etc.)
2. How do I lose money? This is more business model related than #1. What are the supply and demand drivers for the business? Who are their customers? Who are their suppliers? Who are their customers? Who are their competitors? Etc. etc. and then after you’ve identified the core drivers, what would need to happen to hurt the business? These are your key risks. It is also important to develop mitigants to these as well.
Probably a stupid question but when you're looking at asset collateral, do you mostly rely on audited balance sheet figures? Assuming you only really focus on more tangible assets + maybe IP, and disregard DTA style stuff?
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