Fundamental Company Analysis

Intrinsic value

At Citadel, our goal is to make a reasonable estimate of the intrinsic value of a business. This enables us to compare the intrinsic value of a company to today’s market price and judge whether it would be rewarding to purchase shares in this company at the quoted price. Estimating the intrinsic value involves fundamental company analysis, or extensive quantitative and qualitative analysis of a company, the markets in which it operates and its competitors.

Knowledge is key

How do we perform fundamental company analysis? While it may seem like a simple concept, there are various reasons that make it complex to get it right. Having a long track record in financial analysis is a significant advantage. Long-time experience not only has broadened our information network, but has also resulted in accumulated knowledge about many companies, industries and a variety of business models. This is important for two reasons.

Firstly, cumulative knowledge helps to efficiently identify investment opportunities and quickly discard less promising ones. Secondly, knowledge is crucial for risk reduction and helps to achieve the goal of capital preservation. Having in-depth knowledge about the company you’re investing in, significantly reduces the risk of unpleasant surprises that could impair the value of your investment. Of course, it can never eliminate risk entirely, on account of events like pandemics, natural disasters, sudden technology shifts, et cetera. We acknowledge that we can’t be omniscient, but our goal is to make a reasonable estimate of a company’s normalised earnings power. If that appears impossible, we quickly move on to our next case.

Company research

The Fund is able to invest in roughly 20,000 different companies listed in OECD countries, providing a sufficiently large opportunity basket. After initially selecting potential opportunities, we put significant effort into researching a company. We read about the company, its markets, competitors, customers, and suppliers, and draw up a quantitative model. This model allows us to detect the historical strengths and weaknesses of a particular business model and serves as a basis for various valuation techniques.

Simultaneously, we conduct peer group comparisons, sector valuations and M&A analyses to compare our investment opportunity to its listed and unlisted peers. Usually, this research process generates many questions about the company, which we subsequently discuss with company management – or with its customers or competitors. Finally, we test the key assumptions of an investment thesis, including how management thinks and acts on topics such as shareholder value creation.

Assessing the real underlying performance

The results of this elaborate research process are sometimes surprising. It occasionally happens, for instance, that a listed competitor appears to be a more interesting investment candidate than the company we researched in the first place. Sometimes we come across questionable accounting issues, usually a sufficient reason for not proceeding with the investment opportunity. In times of lower economic growth, we often notice increased use of accounting trickery to artificially boost company profitability. In addition, the growing complexity of accounting rules and regulations has become a complicating factor over the last few years. It can obfuscate the underlying financial performance of a company and be very hard to detect.

We believe that fundamental company analysis is the best approach to gaining insight into the intrinsic value of a company. This helps reduce fundamental risks to equity investing and provides solid rules for buy and sell decisions, without the stress of human emotions.