Gp Blast

words have always been an issue for me. After all, it seems that we spend so much time worrying about discount rates, analysts' projections ,and discounted cash flow valuations. Who has time to try and go through the very hard, time-consuming task of not just analyzing the financial statements but the entire business structure as well?

Unfortunately we are never really taught how to evaluate a business. After all, long-term competitive advantage doesn't quite have the same appeal as easy-to-package ratios like a P/E ratio or book value. Yet for those of us who invest in the market, analyzing this is perhaps one of the most important and left-out steps in buying a share in a company. Sure the price you pay is important but in the end the sad truth is that no one knows what any one company is going to earn in the future. So how do we figure out if a company has the prospects we are looking for without an MBA? Michael Porter of Harvard University and author of Competitive Advantage developed the best method I know of. It is called the 5 forces of competition and it tells us in a nutshell the 5 things we must determine when evaluating a business's profitability in the future. These are as follows.

1. Threat of entry

This is how easy it is for a firm to enter the industry that your company is in. This is important because any industry worth looking at should earn above average returns. Those returns ultimately attract competitors who want to earn those high returns as well. However, when too many competitors join the fray it eventually drives prices and returns down and makes the industry unattractive. Usually companies that can protect themselves (also known as having a moat around their business) are either business that require high investment to enter (like Aerospace or Oil), have important brands (like Coke), have high switching to change (like Microsoft) or have a patent barring competitors (like drugs)

2. Bargaining power of suppliers

Companies who have only a few suppliers can't bargain with them or play one off another for better prices. This leads to higher priced