Assessing company performance
There are many ways to assess company performance across industries. Take, for example, the retail sector. Investors could use various metrics to select the best-performing players in the local sector, using data such as revenue, conversion rates, customer retention rates, or foot traffic.
Another option is relative performance per square metre (m²). When applying this metric to the local sector, it reveals how well Truworths International Limited (TRU-JSE) has done relative to peers on most metrics. It also highlights the historical underperformance of Foschini Group Limited (TFG-JSE) and, correspondingly, the present opportunity and risk of operating leverage.
While the business models of the companies below are different and are key drivers for the different outcomes, this analysis highlights why profitability and margins in some of the counters have been under such meaningful pressure and why the counters are so geared to changes in revenue growth.
Total income follows the same pattern as revenue per m². However, Truworths stands out in how much higher its total income is per m² of trading space compared to its peers. For context, Truworths delivered >2x the total income per m² relative to the Mr Price Group (MRP-JSE) and the Foschini Group in FY23.
When assessing a company’s performance for trading purposes, there are several key factors to consider:
Financial Performance: Evaluate the company’s financial statements, including revenue, profitability, cash flow, and debt levels. Look for consistent growth in revenue and earnings, healthy profit margins, positive cash flow, and manageable debt levels.
Industry and Market Analysis: Understand the company’s position within its industry and the overall market. Analyze industry trends, market share, competition, and potential growth opportunities or threats.
Management and Leadership: Assess the quality and track record of the company’s management team. Look for experienced leaders with a strong strategic vision and a history of successful execution.
Competitive Advantage: Determine the company’s competitive advantage or unique selling proposition. Assess its ability to differentiate itself from competitors and maintain a sustainable competitive edge.
Growth Potential: Evaluate the company’s growth prospects. Look for factors such as new product launches, expansion into new markets, acquisitions, or partnerships that could drive future growth.
Risk Factors: Identify and assess potential risks that could impact the company’s performance, such as regulatory changes, industry disruptions, economic conditions, or geopolitical events.
Valuation: Consider the company’s valuation relative to its peers and the broader market. Evaluate key valuation metrics such as price-to-earnings ratio, price-to-sales ratio, and price-to-book ratio to determine if the stock is undervalued or overvalued.
Corporate Governance: Evaluate the company’s corporate governance practices, including board independence, transparency, and shareholder-friendly policies. Look for any red flags or controversies that could impact the company’s reputation or long-term performance.
Analyst Reports and Market Sentiment: Review analyst reports and market sentiment to gain insights from industry experts and market participants. Consider consensus estimates, target prices, and analyst recommendations.
News and Events: Stay updated on relevant news, events, and announcements that could impact the company’s performance, such as earnings releases, product launches, regulatory approvals, or legal disputes.
It is important to conduct thorough research and analysis using a combination of fundamental and technical analysis techniques to make informed trading decisions. Additionally, consider your risk tolerance, investment objectives, and time horizon when assessing company performance for trading.
