Understanding the Business model

First step any fundamental analyst would vouch for  in stock picking is : " Pick a stock only if we understand  the business model ".

 Lets learn the business model  through a series of questions ,  and here I have focused  mainly on the Qualitative aspects of questioning . Sector wise we can fine tune these questions and in my future blogs I'll endeavor to do it , but for now lets get into generic mode of understanding the business model 

First one that we would intuitively ask is  : 

• What is a business model ?  Simply put : it is the way in which company makes money . 
• What does the company manufacture  or provide as a service ?
• Who are the customers ? How often would the consumer need to buy/use this product ? Is the product readily available in the stores nearby?
• What are the core products , if any ?
• What are the various sources of revenue ?   Is the core product alone generating revenue ?                   For example ,
• We have to look at the after sale service model for certain products 
• Information about the input to the product ? For example a complete ban on plastic will close the shutters of many company mainly dependent on  plastic as its raw material . Ban on tobacco has considerably reduced revenues for cigarette manufacturing companies etc . Price fluctuation of input materials also needs to be considered
• Does the service/product of the company have any competitive advantage ? Moat around the business model is extremely important .  Customer recall factor matters the most . Eg. First word anybody would associate with an adhesive in India is Fevicol ( manufactured by Pidilite Industries )
• How has the product innovation been ? Is major chunk of revenue getting generated from the recent product morphs or is it from the basic version of the product 
•  Distribution & Supply chain management : Are franchises generating revenue ? Is it real estate , rather leasing of  brick & mortar locations , leasing of machines / other infrastructure ? 
• Revenue generated via e-commerce ( which encapsulates app version revenue)
• Export revenue : Which countries are major consumers ? In general , what is the political condition of the major revenue generators ?  How strong is our currency vs currency of those countries ?
• Has the company been recently trying to divert from their main business model?
• Is the company enjoying any tax rebates due to government policy , if yes how long would the company have such an advantage?

 When we venture to buy stocks , its extremely important to understand the business model. To understand the business model in detail , we have to refer to company website , quarterly/annual reports ( especially the Management Discussion & Analysis portion ) , conference calls transcripts  with the company management . 

Understanding the business model is like grammar to a language and it is the foundation for sound and market agnostic investment.