Putting it together
Twenty-one chapters in the order you would actually use them, as a sequence that answers four questions — what the business is, how good it is, what it is worth, and what the price assumes.
Chapter 22 · Advanced
The chapters were ordered for learning. This is the order for working.
1. What is this business
Before any number, one sentence: how does it make money? Who pays it, for what, and why do they keep paying. Chapter 1.
Then the segment note (chapter 4): where the revenue actually comes from, by business and geography. This is routinely more surprising than anything else in the document.
2. Can the numbers be trusted
Do this second, because it determines how much weight everything after it bears.
- The auditor's opinion, and whether a Statement of Impact of Audit Qualifications exists. Chapter 7.
- Cash conversion over five years — operating cash flow against net profit. Chapter 14.
- Related party transactions as a share of revenue and purchases. Chapter 15.
- Contingent liabilities against profit and equity. Chapter 15.
If cash conversion is poor and unexplained, or the auditor has qualified, stop and understand that before computing anything else.
3. How good is the business
- Return on capital employed, five years including a bad one. Chapter 9.
- The DuPont split — is the return earned or borrowed? Chapter 10.
- Operating margin trend, and whether it moves with the industry or against it. Chapter 8.
- Working capital days, and whether receivables are growing faster than revenue. Chapter 11.
By the end of this you should be able to say why the company earns what it earns — pricing power, throughput, or leverage — not merely that it does.
4. What could break it
- Net debt to EBITDA and interest cover, against the worst of the last five years. Chapter 12.
- The maturity profile: how much is due within a year. Chapter 12.
- Customer or supplier concentration, from the notes.
- Promoter pledging, from the shareholding pattern. Chapter 6 of the equity subject.
- Growth that is being bought — rising revenue with falling margins or rising receivables. Chapter 13.
5. What is it worth
- P/E, with the denominator checked for one-offs and for where it sits in the cycle. Chapter 17.
- EV/EBITDA where leverage differs between the companies compared, with capital expenditure checked against depreciation. Chapter 18.
- Price to book for banks and for cyclicals whose earnings cannot be trusted. Chapter 19.
- A reverse DCF — what growth does this price assume? Chapter 21.
The last one is the most useful, and if you only do one, do that.
6. The sentence
Finish with one sentence you could defend:
At ₹___, this company must ___ for this to work, and I think that is / is not likely because ___.
If the blanks cannot be filled, the analysis is not finished. If the filled version sounds implausible read aloud, it is finished and the answer is no.
What the sequence cannot do
Worth repeating from chapter 1 at the end rather than only at the start.
It will not tell you what happens next quarter. The accounts are historical.
It will not make you right. It raises the odds and does not settle them.
It cannot find what was never disclosed. Thorough analysis of a company that was concealing something produces a careful wrong answer, and this has happened to the most capable investors in the world.
What it does is ensure that when you are wrong, you are wrong for a reason you can identify — which is the only kind of mistake you learn anything from.
The habit that compounds
Write the page. One page per company, kept.
Then when the share falls 40%, you have a document written by someone calm who had read the accounts. Your reasons either still hold or they do not, and you find out by reading rather than by feeling — which is chapter 11 of the mutual funds subject and chapter 9 of the equity subject arriving at the same place.
Over years the pages accumulate into something more valuable than any of them: a record of what you thought, what happened, and where your judgement is reliably wrong.
The point
Establish what the business is, then whether the numbers can be trusted, then how good it is, then what could break it, then what it is worth — and finish with one defensible sentence about what the price assumes. The page you write is the output; the ratios are how you get there.
Check yourself
4 questions. Every answer is explained afterwards, including the ones you get right — guessing correctly is not the same as knowing. Score 70% or more and the chapter is marked done.
Question 1 of 4
0 of 4 answered. You can submit with questions unanswered — they simply score zero.
Now do it with your own numbers
Work one company through the whole sequence and write a single page: how it makes money, its returns, its risks, and what the price assumes. If you cannot fill a page, you have found what to read next.
The page is the output, not the ratios. Anyone can compute ROCE; the value is in the sentence explaining why it is what it is.