New on FinoLib · Volume II: Capital Markets
I have just published a new article on FinoLib, my free finance education library: Equity Research Report and One-Page Investment Memo Guide. It is part of Volume II: Capital Markets. Below is a summary of the topic in plain, expert language, so you can follow the idea even before you open the full article.
The idea in plain words
Equity research turns a valuation into a decision: buy, hold or sell, with a price target. A good one-page memo explains how the industry works, what protects the company from rivals, how each unit of sales makes money, whether the reported earnings can be trusted and what could change the story. It also states a view the market doesn’t yet hold, gives a bear, base and bull valuation, and says in advance what would make you sell.
Key points
■Regulation AC requires analysts to certify their views; FINRA Rule 2241 requires the valuation method and risks behind a price target.
■Ridgeline’s placement is worth about $122,000 after the cost of winning it; 63% of its gross profit comes from consumables.
■Probability-weighted value $23.75 against a $19.00 price: +25.0%, with 1.6 to 1 upside to downside.
■Bought at $24.00 instead, the same forecasts imply −1.0% expected and −35.8% in the bear case.
A closer look
Equity research turns a valuation into a decision: buy, hold or sell, at what price, and why. US Regulation AC (effective April 14, 2003) makes analysts certify that a report reflects their personal views, and FINRA Rule 2241 requires a clear explanation of the valuation method behind any price target and a fair presentation of its risks. A strong report works through six lenses:
A worked example
Worked Example — One-Page Investment Memo: Ridgeline Instruments (Illustrative Company)
Recommendation: Buy. Price $19.00. 12-month base-case value $24.70 (+30.0%); probability-weighted value $23.75 (+25.0%). EV 8.33× LTM EBITDA of $150 million; P/E 11.8× on EPS of $1.61; net debt 2.0× EBITDA. Thesis. (1) Consumables, 50% of revenue today, reach about 56% within three years as the installed base grows. (2) Each placement is worth about $122,000 after the cost of winning it, and 63% of its gross profit is recurring. Variant perception. The market prices Ridgeline with cyclical equipment makers, at the 25th percentile of its peers (8.33× against an 8.85× median). We think the recurring mix earns at least the median; the stock trades on instrument orders, not the installed base.
Under the hood
Under the Hood: Ridgeline’s Razor-and-Blade Unit Economics
Each Ridgeline instrument sells for $150,000 at a 35% gross margin ($52,500) and pulls through $25,000 a year of consumables at 65% ($16,250 a year) for an assumed 8 years. At 9%, the consumables stream is worth $16,250 × (1 − 1.09^−8) ÷ 0.09 = $16,250 × 5.535 = $89,941. After an assumed $20,000 cost of winning the placement, one placement is worth $52,500 − $20,000 + $89,941 = $122,441, and 63% of its gross profit arrives after the sale.
Decision rule
Take the position only if you can state the variant perception in one sentence, name a dated catalyst, and set an exit condition in advance. Require a probability-weighted return well above the cost of equity (Ridgeline: 25.0% against roughly 10%) and upside to the base case at least about 1.5 times the downside to the bear case.
The costliest mistake
Buying the right company at the wrong price. Enter Ridgeline at $24.00 instead of $19.00 with every forecast unchanged. The weighted value is still $23.75, so the expected return falls from +25.0% to $23.75 ÷ $24.00 − 1 = −1.0%, and the bear case now costs $15.40 ÷ $24.00 − 1 = −35.8%. A good business is a thesis only if the price does not already assume your base case.
India Lens: Valuation Under SEBI and the Companies Act
The same examples in rupees. Applied to an Indian company with EBITDA of ₹150 crore, 1.7’s peer median of 8.85× gives ₹150 crore × 8.85 ≈ ₹1,328 crore of enterprise value. A rupee cost-of-capital illustration uses a 7% government bond yield, a beta of 1.2 and a 12% expected market return, giving a cost of equity of 0.07 + 1.2 × (0.12 − 0.07) = 13%; with ₹700 crore of equity, ₹300 crore of debt at 8% and a 25%…
Recap
An equity research memo combines industry structure, moat, unit economics, earnings quality, catalysts and a variant perception into a recommendation backed by bear, base and bull cases. The illustrative Ridgeline memo shows a 25.0% probability-weighted return at $19.00 that disappears at a $24.00 entry price.
What the full article covers
The full article includes worked examples, a look under the hood at the mechanics, a clear decision rule, the one mistake that costs people the most, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume II: Capital Markets
Read the full article on FinoLib
The complete article, Equity Research Report and One-Page Investment Memo Guide, with every worked example, diagram, quiz and source, is free to read in Volume II, Capital Markets on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance