Factors that can affect a company or move its share price

Now, this time series number five in the series, we've gone through where to find information, how to look at the profit and loss account, the cash flow, the balance sheet different, the gauge, the importance of assets of news flow.

And now we're really looking at getting into the nitty gritty if things can affect price and also value. So again short term sentiment long term fundamentals. But before we go any further all important disclaimer. Please take time to study this. So when we go, factors that can affect
a company or move its share price. And there are differences, as we discussed in number four with that fantastic chart of ARM.

But price is really sentiment. You can say trading or short term. Lots of different things. But generally fashion fear and greed can all play a massive role here. Voting that Benjamin Graham quote about the market in the short term being a voting machine and in the long run, the weighing machine. Factors that affect price drive votes, factors that affect value, cash flow over time.

They affect the fundamentals of the business. Its ability to generate cash, reward you with dividends, and also the growth rate of the company. The risk associated with that strategy, the predictability of its cash flow, those things really, in the end, drive value. And that comes from cash. Buffett. He looks from economic castles surrounded by unbreakable moats, strong competitive positions.

We've talked a lot about the pumping, beating heart of a company best measured by operating profit, which then filters through to the net profit that we own as shareholders. Where does that strength come from? What is a strong competitive business model have? Well, it has a big market share or a strong brand that makes people want to pay for the product, wants to stump up for it because they want it a technological edge, intellectual property scale again, market share and install base of revenues.

There are very few better models in selling somebody a piece of kit and then sending a man or a woman round with a bag of spanners for the next ten years to service it and make sure that it works. That should see that's part of how much success repeat business. Again, one of the reasons why we've picked out, however, is an example of this, though.

Again, that's not a piece of advice with regards to how much is a stock to buy or to sell, but those are the things you're looking at when it comes to a company's strategy and how it can then turn that hopefully into decent operating margins and cash flow. So strategy really is about drive. It's about winning a customer.

If you have no customers, you aren't going to create much profit or shareholder value, are you? Right? Happy not just finding customers but happy customers. And a happy customer is getting a service or a product that they want. And there's a happy. And also they're prepared to pay the price for it. If you can charge a customer the price you're prepared to charge and they're willing to pay you in business, if you have to have a prayer meeting every time you try and put up your prices, you have a problem.

And if the customer balks at your price, you have a problem. So you really need to provide them with a solution or gratification or somewhere between the two. And then as a company, you want a strong strategy and a sound competitive proposition. The challenge then, of course, is to somebody else come in and try and copy it, but at least you started off in the right direction.

Competitive advantage. You measure that through operating profit and operating margin. Then over time, how do you transfer that as a as a leader? It's really hard. Yes. You need good management. You need good governance. They need good advisers. But then leaders change. Jim Collins always talks about level five leaders, not those who could do it when they were there, but who laid the foundations for an easy transition and the model kept on working.

You want to know how hard it is. Alex Ferguson couldn't do it at Manchester United. I'm not among you, fan, but what he did was amazing. But look how hard they found it. Since he's gone, that's how hard it is to be a level five leader. But ultimately he can do that with a successful strategy, successful plans, successful future planning, profits, cash flow and then for you, the shareholder dividends.

So how can you sell the strategies working operationally, pricing, power, market share, barriers to entry, happy stakeholders, happy staff, financially, high profit margins. Again, the operating margin, high returns on capital, strong cash flow and ultimately happy shareholders because they getting their slice of the action through a rising share price or a rising dividend or both. So how can you judge a competitive position?

Well, I have not to make this up. This is Michael Porter, his Five Forces Harvard Business Review in the 1970s. He's refined it since. This still works for me. Whenever I look at a company to write a column or a piece or I'm on the television, I'm trying to think about this. All of the different all of the time.

So first of all, in the middle you have industrial rivalry. You're making a lot of profit. Some of the devil is going to turn around the corner and try and get their slice of it, because that's how capitalism works. What's the best deal for high prices? High prices because it generates more supply and more competition, for example. So that's the first thing to look at.

What's the dynamic with the industry. But then you have to look at how easy is it for me to push to deal with my suppliers. How easy is it for me to deal with buyers, new entrants, substitutes? All of these things will affect demand for my product. The price that my customers are prepared to pay in exchange for their solution and their gratification.

Can they get the solution more cheaply and just as good somebody else? Great. Generally, I look for companies that do things better, not more cheaply. They'll always be a kamikaze merchant that can come in and undercut you, but they might be cutting corners someplace and that might catch up with them in the end in terms of the quality of product or service.

But again, that's a matter your research can help you judge. Again, strategy is not we've discussed this before. Stretch it. And if a company says to me this in a meeting, I'm pretty much falling at my bottom, closing the door on them. Except that be really rude. I'll stretch it out for a little bit. But if a company says to me our strategy is to grow by, our strategy is to make a profit by our strategy to create shareholder value by book snapshot.

You can't do any of those things without customers. So what I want to know from a company is how do they get the customer through the door, and how do they get them to pay for the products? Our solution that they're offering, the numbers, the profit, the growth, the shareholder value, that's how we keep score. And we looked at that in video two and to a degree in video three that shows how efficacious is the company strategy and how strong is its sense of purpose.

And companies will try and prove to you, by making their forecasts that they're doing a really good job. But then you got to be aware that they don't get a little bit creative with the numbers and stop making the demo. And just as a spectacular example of why growth is not a successful strategy or can be a very dangerous one, here's our good friend NatWest NatWest Group.

Used to be known as Royal Bank of Scotland. They may have changed the name for a reason given this share price chart and, in fairness, NatWest charts now an 11 year high, though you wouldn't guess it from that that chart there. But yes, sir. Fred Goodwin acquired lots of businesses and grew the Royal Bank of Scotland didn't work out that well in the end, did it?

So when you're assessing a company's model, how do you break it down? We've already talked about price times volume minus cost equals profit. These are some of the things that will help you understand how those dynamics fit together. I won't read out every single one. Whether you've got demand secular or cyclical, you've got pricing, you've got costs, drivers of volume, drivers of price drives, of course, and they will give you a really deep understanding of what really makes a business tick.

And companies will help you. They will talk about what are their KPIs, their key performance indicators. It will vary from industry to industry, but nevertheless, once you get a strong feel for those, you'll get a strong feel for what really makes a company tick over the long term. Now again, I can't read all of those. I will boy to tears.

So pause the video, read them, soak them up, knock them down. No, but they're a really, really good, crisp guide to judging risk and reward. Whether it's looking at, again, the high operating margin, the pumping, beating heart which looking at free cash flow return on capital, the amount of risk in the business posed by operational gearing. How much revenue, how much profits change for a 1% change in sales and financial gearing?

Again, that debt calculation that we did that included pensions liabilities and contingent and contingent liabilities, interest cover, free cash flow cover for dividends for all of these things. Very important. And again, not just for one year, definitely not for just 3 or 6 months, but over a period of time and preferably over full economic cycle. To give you a good long term picture of our company performs not just when things are going well, but when they're going badly, because inevitably they will go to the cycle or product cycles or competition, how they respond to that, and many of the real feel for reward and risk over a long period of time.

So yes, narrative helps, narrative matters. It can carry a stock a long, long way, but ultimately maths matters and the maths is operating margin, net profit, cash flow. And they in turn try things like shield rewards and dividends. And then of course, you've got to take into account valuation and making sure you don't overpay it in enthusiasm for that particular narrative and that cash flow and that net profit and the operating profit growth, no stretch shareholder value, no profit.

It helps. But they're not strategy. They want results from strategy. They measure the efficacy of a strategy. And again, looking at organic organic growth operating margin will help is really just the strength of a company's business model. Firms that can show positive trends. It's always a good sign they will attract a premium valuation for predictability, consistency and high returns.

The P in the P/E the more dependable a business, the more profitable business, the faster it grows to a degree. As long as you're going to the higher price on multiple people will pay off the earnings. And if the earnings grows well you get a double whammy.

Price up multiple up share price bang. But as we saw spectacularly with Royal Bank of Scotland NatWest as it is now, that can go into reverse. Things go wrong, people get frightened, they pay a lower multiple. The earnings go south. Double whammy works the other way down. So that's again how we try and measure what the the risks are not just see what's always think of P and E or multiple an e in the context of this 3D picture that we've built a profit and loss account, cash flow or balance sheet and numbers strategy, valuation with through five of the six videos now coming up to the last one.

So we've now looked at we're trying to build this full picture again of numbers strategy, valuation. And in the last one we're going to pull it together with some practical historic examples that won't be investment advisor recommendations, but hopefully will give you some useful pointers as to what to look for when you're doing your own research.