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How we analyse a business - part 3

Feb. 29, 2024
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EasyEquities
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EasyEquities

How we analyse a business step 2/3

Please note that this is not financial advice. 

This is just a brief description of how we analyse stocks and it should be said that investors can dig a lot deeper than this.

To make this easier, we will break it down into 3 simple steps:

  1. Understanding the business 
  2. Financials 
  3. Researching leadership and management

In part 1 and 2, we started with step 1, in this article we will continue with step 2. 

2/ Financials year ended July 2021

We will look at the following:
Revenue
Gross Profit Margin
FCF vs debt
P/E ratio
P/S ratio
ROA & ROE

All metrics will be compared to peers to understand them better.

Revenue

Shoprite- R168 billion. This is an increase of 8.1% YoY.
Clicks- R39.9 billion. This is an increase of 10.7% YoY.
Spar- R127.9 billion. This is an increase of 3% YoY.
This indicates that Shoprite is much larger and growing well.

Gross Profit Margin

Shoprite- 24.5%
Clicks- 20.37%
Spar- 19.29%
Shoprite makes more profit before deductions.

Free Cash Flow vs Debt

Shoprite has a flawless Balance Sheet and debt is well covered by cash.
This is a good sign, especially with hike rates looking certain. Its always good to avoid companies with tons of debt.

Price to Earnings Ratio

Shoprite- 23.91x
Clicks- 38.28x
Spar- 13.9x
Industry average- 26.5x

This indicates that Spar is undervalued and that Shoprite is fairly valued.

Price to Sales ratio

Shoprite- 0.75. It will take SHP 0.75 years to make investors money back in sales.
Clicks- 1.87. It will take Clicks 1.87 years to make investors money back in sales.
Spar- 0.25. It will take Spar 0.25 years to make investors money back in sales.

ROA and ROE

Shoprite ROA = 9.39%
Shoprite ROE = 22.92%

Clicks ROA = 16.51%
Clicks ROE = 38.25%

Spar ROA = 6.68%
Spar ROE = 26.36%

This indicates that Shoprite's management is average at turning assets and shareholders money into profit.
 


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