The analyst's toolkit
Eight questions, asked of every company, in the same order.
These are the frameworks behind every teardown in the library. None of them is complicated — the difficulty is asking them honestly about a company you already admire. Each one below says what it is for, what it catches, and where to see it working on a real business.
§01 — The business model
How does the money actually arrive?
Before anything else, trace one dollar from the customer's hand to the company's bank account and name every party that takes a cut. Most confusion about a company dissolves at this step, because the stated business and the actual business are often different — a burger chain that earns on rent, a retailer that earns on membership.
What it catches
If you cannot explain the profit from the thing the company appears to sell, you have not found the business yet.
Seen working on
McDonald'sFranchises roughly 43,000 restaurants that sell about $130 billion of food a year, of which McDonald's Corporation books under $26 billion — mostly as rent and royalties.
§02 — Unit economics
What does one customer, or one item, really earn?
Take the smallest repeatable transaction and lay out its revenue and its costs. The company-wide income statement hides everything; the unit tells you whether growth makes the company better or worse. A business with negative unit economics does not fix itself by getting bigger — it gets worse faster.
What it catches
Costs that scale with volume belong in the unit. Costs that don't — head office, brand advertising — do not.
Seen working on
NikeDesigns and markets athletic footwear and apparel, manufactures almost none of it, and sells the meaning of the product rather than the product.
§03 — Porter's five forces
Who has the power in this market?
Five pressures decide how much profit a market lets anyone keep: rivalry among existing competitors, the threat of new entrants, the threat of substitutes, the power of buyers, and the power of suppliers. Score each honestly, including where the company is weak. A profitable company in a five-force vice is usually enjoying something temporary.
What it catches
Score the industry as it is, not as the company's investor deck describes it.
Seen working on
GlossierA beauty brand grown out of a blog's comment section, built direct-to-consumer on purpose, that eventually had to sell through the retailer it was founded to bypass.
§04 — Moat analysis
Why do the profits last?
High profits attract competition; a moat is whatever stops the competition from taking them. There are only a handful of real ones — brand, network effects, switching costs, scale economics, counter-positioning, distribution, process power. Anything else on the list is usually a head start being mistaken for a moat.
What it catches
A great product is not a moat. Ask what specifically prevents a well-funded rival from copying it in three years.
Seen working on
HermèsA sixth-generation family-controlled French house that makes leather goods by hand in its own French workshops, sells them almost exclusively through its own stores, and deliberately produces fewer of them than people want to buy.
§05 — The three statements
Do the numbers agree with the story?
The income statement says what the company earned, the balance sheet says what it owns and owes, the cash flow statement says what actually moved. When the three disagree — profit rising while cash falls, say — the disagreement is the most interesting fact about the company.
What it catches
Profit is an opinion; cash is a fact. When they diverge, follow the cash.
Seen working on
AmazonRuns a near-breakeven retail operation at enormous scale, and earns essentially all of its profit from renting out the two things that operation forced it to build — computing capacity and shelf placement.
§06 — Discounted cash flow
What is it worth, and how confident can you be?
A company is worth the cash it will produce, discounted for the wait and the risk. The arithmetic is simple. The inputs are guesses, and most of the answer usually rests on what happens after year five — the part nobody can forecast. The point of building one is not the number; it is finding out which assumption the number is hostage to.
What it catches
If most of your value sits in the terminal value, you have built a forecast of forever and called it analysis.
Seen working on
AppleSells roughly 240 million phones a year at a premium price, then collects a high-margin toll on the software, storage and services those phones make it painful to leave.
§07 — Comparable multiples
What is the market paying for companies like this?
Price-to-earnings, EV-to-sales, and the rest are shorthand for a full valuation. They are fast and they are honest about being relative — a multiple tells you what the market thinks, not what something is worth. Useful for spotting when a company is priced very differently from its peers, and for asking why.
What it catches
A cheap multiple against a declining business is not cheap. Always ask what the peer group is growing at.
Seen working on
LululemonDesigns and sells technical athletic apparel almost entirely through its own stores and website, at full price, to customers who wear it when they are not exercising.
§08 — Capital allocation
What does management do with the cash?
Reinvest, acquire, pay down debt, buy back stock, or pay a dividend. Over a decade this single skill separates great chief executives from good ones, and it is the easiest thing to check: read what they said they would do five years ago and compare it with what they did.
What it catches
Buybacks at a high price and issuance at a low one is value destruction wearing a shareholder-friendly costume.
Seen working on
NikeDesigns and markets athletic footwear and apparel, manufactures almost none of it, and sells the meaning of the product rather than the product.