investment-analysis

Investment Analysis

Investment decision support based on financial data

Applicable Scenarios

• Financial report reading and analysis
• Company valuation calculation
• Portfolio evaluation
• Industry comparative analysis

Analysis Framework

Process: Industry analysis → Company analysis → Valuation analysis → Risk assessment

Core Indicators

Profitability

Indicator	Formula	Good Standard
ROE	Net Income / Shareholders' Equity	> 15%
ROA	Net Income / Total Assets	> 8%
Gross Margin	Gross Profit / Revenue	Above industry average
Net Margin	Net Income / Revenue	Above industry average

Valuation Indicators

Indicator	Formula	Description
P/E	Stock Price / EPS	Price-to-Earnings ratio, the lower the cheaper
P/B	Stock Price / Net Asset Value per Share	Price-to-Book ratio
PEG	P/E / Earnings Growth Rate	< 1 may be undervalued
EV/EBITDA	Enterprise Value / EBITDA	Valuation considering debt

Three Financial Statements

Income Statement	Balance Sheet	Cash Flow Statement
Revenue - Cost = Gross Profit	Assets = Liabilities + Equity	Operating + Investing + Financing
Gross Profit - Expenses = Net Income	Current vs Non-current	= Net Cash Flow

Best Practices

1. Look at long-term trends - Look at at least 5 years of data
2. Peer comparison - Compare indicators with competitors
3. Qualitative analysis - Don't just look at numbers, understand the business model
4. Margin of safety - Conservative valuation, leave room for error
5. Diversification - Don't put all your eggs in one basket

Common Mistakes

Mistake	Correct Approach
Buying just because P/E is low	Judge based on multiple indicators
Chasing hot stocks	Independently analyze fundamentals
Ignoring cash flow	Cash flow is more important than profit
Panicking over short-term fluctuations	Focus on long-term value

Sharp Edges

SE-1: Value Trap

• Severity: critical
• Scenario: The stock looks cheap (low P/E, low P/B), but the stock price keeps falling
• Cause: The company's fundamentals are deteriorating, and "cheap" reflects the market's pessimistic expectations for the future
• Symptoms: P/E is 50%+ lower than peers, revenue has declined for consecutive periods, the industry is being disrupted, key customers are lost
• Solution: Check revenue trends (5 years), analyze the moat, assess industry prospects

SE-2: Over-reliance on a Single Indicator

• Severity: high
• Scenario: Making investment decisions based only on P/E or ROE
• Minimum Requirements: Profitability + Valuation Metrics + Cash Flow + Financial Health + Qualitative Analysis

SE-3: Holding Decisions Caused by Anchoring Effect

• Severity: high
• Scenario: Unwilling to sell at $80 because "I bought at $100"
• Solution: Ask yourself: "If I didn't own this stock now, would I buy it at the current price?"

SE-4: Confirmation Bias

• Severity: medium
• Scenario: Only looking at information that supports one's own view, ignoring negative news
• Solution: Actively search for "[company name] risk", list failure scenarios, review regularly

SE-5: Earnings Quality Trap

• Severity: high
• Scenario: Company has high net profit but it is actually unsustainable
• Red Flags: Operating cash flow << net profit, large amounts of non-recurring gains and losses, accounts receivable growth > revenue
• Check: Operating cash flow/net profit > 80%, accounts receivable growth <= revenue growth

DCF Valuation Model

Formula: Intrinsic value = Σ (future cash flow / (1 + discount rate)^n) + terminal value

Steps: Forecast FCF (5-10 years) → calculate terminal value → choose WACC → discount back to present value → divide by number of shares

Free Cash Flow: FCF = Operating Cash Flow - Capital Expenditure

Relative Valuation Method

Judgment Logic:

• P/E < industry average and ROE > industry average → possibly undervalued
• P/E > industry average and ROE < industry average → possibly overvalued

Note: Undervaluation does not mean you should buy; you need to understand the reasons behind it

Financial Report Red Flag Warnings

Signal	Possible Problem
Revenue growth but cash flow decline	Accounts receivable problem
Inventory turnover ratio decline	Products not selling
Gross margin continues to decline	Intensified competition
Increase in days sales outstanding	Poor customer payment ability
Debt ratio rising rapidly	Increased financial risk
Frequent related-party transactions	Risk of tunneling

DuPont Analysis

Formula: ROE = Net Profit Margin × Asset Turnover × Financial Leverage

Analysis Focus: Which factor contributes the most? Is high ROE driven by profitability or leverage?

For a detailed example, see extended/examples.md

Industry Analysis Framework

Industry Life Cycle

• Introduction Stage: High-risk venture capital type
• Growth Stage: Growth stock investing (high P/E acceptable)
• Mature Stage: Value stock investing (stable dividends)
• Decline Stage: Avoid or special-situation investing

Porter's Five Forces

Assessment: threat of new entrants, supplier bargaining power, buyer bargaining power, threat of substitutes, existing competition

For a detailed assessment framework, see extended/examples.md

Moat Analysis

Type	Description	Example
Brand	Consumers are willing to pay a premium	Coca-Cola, Hermès
Switching Costs	High cost of switching products	SAP、Adobe
Network Effects	The more users, the higher the value	Facebook、Visa
Cost Advantage	Low-cost production	Walmart, TSMC
Intangible Assets	Patents, licenses	Pfizer, franchising

See the detailed evaluation checklist at extended/examples.md

Tool Recommendations

• Financial Report Lookup: Market Observation Post System, Yahoo Finance, Simply Wall St
• Valuation Tools: Excel DCF template, Finviz
• Research Reports: Brokerage research reports, Seeking Alpha
• Tracking Tools: TradingView、Stock Portfolio Tracker

Extended Resources

• extended/templates.md - Investment checklist, financial report reading guide, quantitative screening criteria
• extended/examples.md - DuPont analysis example, industry cycle chart, moat evaluation checklist

Disclaimer

This content is for educational reference only and does not constitute investment advice. Investing involves risk; please consult a professional advisor before making decisions.