5 Types of Company Data That Savvy Investors Know How to Use
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Any investor who has conducted fundamental analysis on a company knows that having access to deep and broad sources of data makes all the difference. 10-Ks and other SEC filings can reveal a wealth of financial information, but to gain an edge, investors have to go further, augmenting these sources with non-traditional information to paint a more complete picture.
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Thanks to consumers moving online and companies responding to this by expanding digital channels, investors can use digital market intelligence data that helps them understand a great deal about how a company is functioning. When combined with conventional company data, it becomes easier to uncover undervalued opportunities.
Here are five types of traditional and non-traditional company-related data that savvy investors leverage to assess opportunities.
Asset Turnover
The “asset turnover ratio” metric is a staple of fundamental analysis. It's calculated by dividing total revenue (less uncollectible receivables) by average assets, all of which you should be able to discern by examining the prospective investment company’s 10-K. The ratio helps investors understand how well a company is turning its assets into sales. A ratio of 1 is typically considered good, however, allowances must be made to take industry benchmarks into account.
While this ratio is useful, it's susceptible to manipulation. For instance, a high intangible asset value will skew the ratio. An investor's aim here is to figure out what the company's cash flow cycle is like. Therefore, it's better to use a working capital turnover ratio.
To calculate this number, divide the net sales by the average working capital balance. When benchmarked against other companies in the industry, this number provides insight into how soon the company monetizes the assets it can make money from.
Aside from calculating this number, investors must also look at the payment cycles the company expects. Divide payables into smaller time buckets to figure out when the organization needs to pay cash. Do the same with receivables as well. Now compare the two cycles to understand what the company's working capital will look like soon.
Examining the rate of capital expenditures is also useful. Capex is what creates assets, and investors often ignore the frequency with which a company has to replenish them. For instance, a company might report bumper earnings but will need to reinvest all of that as capex. If they neglect to do so, future earnings will be in jeopardy.
Digital Competitor Analysis
Investors are used to benchmarking industry financial data. Carrying this process over to digital data makes sense. Examining benchmark trends and a company's position relative to its peers sheds further light on its marketing and sales strategies.
These days, companies engage consumers on multiple platforms. A company's website might receive low numbers, but its app might be extremely effective. Investors have to analyze sources of traffic as well as platforms.
In addition to this, examining platform trends in an industry is also helpful. For example, retailers that choose to sell goods through apps versus ones who sell through websites will have different engagement metrics. Investors need to look at industry benchmark data to understand which platform, app or website, is the better choice in the long run.
Earnings Coverage
Companies in fixed asset-heavy industries have to rely on financing to cover costs. As a result, earnings coverage ratios are extremely valuable. A conventional ratio such as the earnings interest coverage is a good place to begin. Here too, publicly traded companies’ regular financial filings should give you all the information you need to parse it all together.
Examining the relative proportions of expenses that draw from revenues is also useful. Instead of examining the bottom line coverage, expressing interest expenses as a percentage of revenues or a ratio is helpful. For instance, if a company's interest expense is greater than 30% of its top-line revenues, it's safe to say that the company's cash flow has to be scrutinized.
Highly leveraged companies are often in such situations. Without adequate cash flow, debt can kill equity growth instead of boosting it. This means cash collection cycles have to be scrutinized, along with metrics such as day sales outstanding (DSO).
For example, a highly leveraged company has to have a DSO that is far lower than the industry average if it hopes to compete in the long run.
Digital Traffic Sources
Many investors dive into financial data but forget that these numbers only indirectly measure marketing and sales effectiveness. Thanks to companies moving to omnichannel business models, digital traffic is more important than ever.
Crucially, there's no way to fudge or manipulate traffic numbers. The number of monthly visitors a website receives is, unto itself, a valuable indicator of how effective its digital marketing campaigns are. Examining a website's traffic sources is also critical.
For instance, a company that relies primarily on paid social media traffic will incur increasing marketing expenses. In comparison, a company that generates huge organic traffic, through high rankings in search engines, is better positioned to weather cash flow uncertainty.
Analysts’ go-to stock market data resources have moved beyond traditional financial metrics, and these digital datasets provide investors with an edge when it comes to finding undervalued companies.
Company Partnerships
Companies that produced complementary products have always collaborated. These days, it's easy to examine the quality of a company's partnerships and how well it fits into its ecosystem. Referrals and brand partnerships are the lifeblood of rising companies, and there's a wealth of data that investors can analyze.
For instance, a company that is gaining a lot of social media traction via influencer marketing will attract investment interest. However, investors must dive deeper and examine the quality of these relationships. How targeted are influencer relationships?
A company that produces male fitness products can generate clicks by signing a female fitness influencer. However, the traffic they receive is less likely to be relevant to the product. A company that has lower traffic numbers but a highly targeted audience is a much better bet.
A marketing department that laser-targets an audience understands the product and the people that consume it. The quality of partnerships and collaborations reflects how efficient the marketing team is.
Gaining An Edge
Investors can use all the edges they can get in the market. Digital market intelligence platforms help investors paint a better picture of the companies they're looking at. Trends in these data can help quantify a portfolio company's position and unearth potential opportunities.
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