Chapter 12: Qualities Of A Good Research Report

Chapter 12: Qualities Of A Good Research Report – NISM-Series-XV Research Analyst Exam Study Notes Download PDF Book 

Qualities of a Good Research Report

  • Multipurpose Nature of Research Reports:
    • Investment idea presentation.
    • Market perspective provision.
    • Detailed company analysis.
  • Information Accessibility:
    • Access to similar information (annual, quarterly reports, etc.) by all analysts.
  • Differentiation through Presentation:
    • Stand out by unique presentation of views, conclusions, and recommendations.
  • Importance of Communication Skills:
    • Equally important as analytical skills in an analyst’s role.
  • Creativity in Report Writing:
    • Creative structuring and message communication.
    • Transforming complex financial data into comprehensible content.
  • Essential Qualities for Effective Reports:
    • Clarity of Idea: Concise and clear presentation of the core idea.
    • Simplicity of Delivery: Easy-to-understand and straightforward explanation.
    • Clear Argument Presentation: Logical flow and coherent argument structure.
    • Narrative Structure: Effective storytelling approach in presenting data.
    • Customization According to Reader: Tailoring content for specific reader groups.

A good research report is a versatile document that effectively presents an investment idea, offers a market perspective, and conducts a thorough company analysis. Its quality is enhanced by the way analysts present their analysis, focusing on clear, simple, and well-structured communication tailored to different types of readers.

Writing a Good Research Report

Topic Pointers:

Three Key Steps:

  • Planning: This involves setting out the structure and content of the report, including sections like company business, peer group analysis, shareholding pattern, etc.
  • Drafting: Writing the report based on the plan, with attention to factual accuracy and clear communication.
  • Editing: Refining the draft, ensuring clarity, coherence, and accuracy.

Major Sections of a Research Report:

  • Company Business
  • Peer Group Analysis
  • Shareholding Pattern
  • Key Strengths and Concerns
  • Industry Overview
  • Company Fundamentals
  • Key Financial Indicators
  • Financials

Approach to Writing:

  • Assign deadlines for each section, especially important during busy periods like quarterly results season.
  • Use organisation-specific templates to streamline the process.
  • Fact-based sections can be compiled more quickly, but sections requiring business understanding and management communication need more attention.

Importance of Discipline: To avoid delays and cascading effects on work, maintain high discipline in planning and execution.

Writing a good research report involves three crucial steps – Planning, Drafting, and Editing. It includes several major sections like company business, peer group analysis, and financials, which are compiled by following a disciplined, deadline-oriented approach to ensure accuracy and completeness.

Fact-based Sections in Research Report

Topic Pointers:

Key Fact-based Sections:

  • Peer Group Analysis: Comparing the company’s performance with its competitors or similar companies.
  • Shareholding Pattern: Distribution of company shares among various shareholders.
  • Company Fundamentals: Basic financial health indicators such as revenue, profit, debt, etc.
  • Key Financial Indicators: Metrics like Earnings per Share (EPS), Return on Equity (ROE), etc.
  • Financials: Detailed financial statements including balance sheet, income statement, cash flow.

Sources of Information:

  • Annual Reports: Comprehensive reports on company’s activities throughout the preceding year.
  • Quarterly Reports: Updates on financial performance and other significant developments every quarter.
  • Calculations: Deriving financial ratios and metrics from the reported data.

Fact-based sections in a research report include peer group analysis, shareholding pattern, company fundamentals, key financial indicators, and financials. These sections are derived from reliable sources such as annual reports, quarterly reports, and specific financial calculations.

View-based Section in Research Report

Topic Pointers:

Key View-based Sections:

  • Company Business: Detailed understanding of the company’s operations and business model.
  • Key Strengths: Distinctive advantages or positive aspects of the company.
  • Key Concerns: Potential risks or challenges faced by the company.
  • Industry Overview: Broad analysis of the industry in which the company operates.

Sources of Information:

  • Communication with Management: Gaining insights directly from the company’s management team.
  • Personal Understanding: Leveraging the analyst’s own knowledge and understanding of the business and industry.

Data Presentation:

  • Suggestion to use data visualisation software for creating visual charts, making the data easier to comprehend.

Draft Review Process:

  • Ensuring accuracy of financial figures.
  • Conducting spell-checks and grammatical corrections.
  • Editing the draft to improve clarity and accuracy.

The view-based section in a research report includes company business, key strengths, key concerns, and industry overview. These sections rely on information sourced from communication with management and the analyst’s personal understanding of the business and industry. It’s recommended to use visual data presentation for clarity and to thoroughly review the draft for financial, spelling, and grammatical accuracy.

Things to Watch Out for in Research Reports

Topic Pointers:

  • Avoid Unnecessary Details: Focus on relevant information; excessive details can dilute the report’s impact.
  • Use Short Sentences: Long, convoluted sentences can make the report difficult to understand.
  • Proper Structure is Crucial: Organise the report in a logical, coherent manner to facilitate easy understanding.
  • Maintain Consistent Views: Inconsistencies in viewpoints or analysis can undermine the report’s credibility.
  • Avoid Complex Language: Use clear and simple language to ensure the report is accessible to a broader audience.

The failure of many research reports can be attributed to factors such as including unnecessary details, using long sentences, lacking a proper structure, having inconsistent views, and employing complex language. These elements can detract from the report’s effectiveness and prevent it from gaining attention.

Understanding Rating Conventions in Financial Markets

Topic Pointers:

Common Ratings:

  • Buy: Expectation of over 10% returns in the next 12 months.
  • Hold: Expected return between -10% and 10% over the next 12 months.
  • Sell: Anticipated return of less than -10% over the next 12 months.

Other Recommendations:

  • Accumulate/Reduce: Indications of triggers expected within a defined timeframe, influencing the stock’s performance.
  • Outperformer/Underperformer: Relates to a stock’s expected performance compared to the sector or market.

Weight-Based Ratings:

  • Overweight: Stock or sector likely to outperform the market.
  • Underweight: Expected to underperform relative to the market.
  • Equal Weight: Performance anticipated to be in line with the market.

Interpretation and Application:

  • Different research agencies might have varying definitions for each term.
  • Analysts usually provide interpretation in the research report for clarity.
  • Importance of understanding the analyst’s perspective before making investment decisions.

Rating conventions in financial markets refer to the terms used by research analysts to communicate their recommendations on stocks. These include terms like “buy,” “hold,” “sell,” “overweight,” “underweight,” and others, each reflecting the analyst’s expectation of the stock’s performance over a certain period.

Checklist Based Approach to Research Reports

Topic Pointers:

  • Addressing Information Overload: In the context of abundant and sometimes contradictory information, a checklist helps maintain focus and consistency.
  • Disciplined Decision Making: Emphasises the importance of disciplined investing and the pitfalls of emotional or disorganised approaches.
  • Advantages of Using Checklists:
    • Avoiding Mistakes: Helps prevent lazy mistakes or shortcuts.
    • Ensuring Discipline: Guarantees that analysts consistently follow their intended processes.
    • Objective Decisions: Aids in making fact-based, objective decisions.
    • Decision-Making Trail: Provides a record for review and improvement over time.
  • Learning from Other Fields: Drawing parallels from aviation and military, where checklists have been effectively used to avoid accidents and improve results.
  • The Checklist Manifesto: Reference to Dr. Atul Gawande’s book, highlighting the distinction between errors of ignorance (lack of knowledge) and errors of ineptitude (incorrect application of knowledge). Checklists help in reducing the latter.

A checklist-based approach to research reports is a methodical strategy used to ensure consistency and discipline in decision-making amidst information overload. It helps in avoiding errors and maintaining a disciplined investment strategy.

Sample Checklist for Investment Research Reports

Topic Pointers:

Qualitative Parameters:

  • Understand the business and its technology collaborations.
  • Analyse the revenue model and segment-wise revenue contribution.
  • Assess if the product is a necessity or a choice.
  • Evaluate the presence of product substitutes and their impact.
  • Identify distribution channels and marketing infrastructure.
  • Check if the business is scalable and has a good franchise potential.
  • Determine the demand-supply gap in the industry.
  • Project the business’s future in the next decade.
  • Examine the company’s competitive advantages and their sustainability.
  • Identify risks and downside in the business, company, and industry.

Quantitative Parameters:

  • Review equity history and significant points.
  • Evaluate consistent revenue growth and future visibility.
  • Assess stability and growth in profitability.
  • Check leverage ratios and interest coverage.
  • Analyse return on equity (ROE) and return on capital employed (ROCE).
  • Examine dividend track record.
  • Review cash flow stability and growth.
  • Note auditors’ qualifications and important observations from financial statements.

Valuation Parameters:

  • Determine the intrinsic value of the business.
  • Compare business valuation with peers and market.
  • Identify the margin of safety and reasons for market mispricing.

Final Decision Parameters:

  • Assess the company’s financial discipline.
  • Consider the quality of assets, earnings, and cash flows.

A sample checklist for investment research reports is a comprehensive set of questions and parameters designed to evaluate an investment opportunity thoroughly. This checklist covers qualitative, quantitative, valuation, and final decision aspects to aid in disciplined and informed investment decisions.

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