Analyzing Business model- A Step-by-Step Guide

Explaining via Examples to solidify the concept

Apr 18, 2025

The next step in analyzing a company with confidence

Welcome back to the Steady Investing series, where I break down one key concept at a time to help you become a more confident, independent investor.

In this post, we're covering a critical (and often overlooked) part of company analysis:

Understanding how a company actually makes money.

This is the foundation before diving into valuation models, ratios, or stock price charts. If you can’t explain what the company does, who its customers are, and how it earns revenue, you shouldn’t be investing in it

If you missed the previous post in this series, check it out:

ROIC - Explained in Simple terms
How to analyze a company - this provides high-level steps to analyze a company like a pro investor

Next in this series:

Management - Track Record & Skin in the Game
Moat & Risks
Growth, Profitability & Healthy Balance Sheet
Future Growth & Valuation

Don’t forget to subscribe so you don’t miss the rest of this deep-dive series.
Each topic is designed to give you practical tools and knowledge to analyze businesses like a pro.

Following a consistent process and checklist has helped me outperform the market every year since inception, with a 33% CAGR vs. 8% for the S&P 500.

Let’s dive in.

1. How Does the Company Make Money?

This is the #1 question every investor must ask.

What is the company's core product or service?
Who is their customer?
Are they selling physical products, software, subscriptions, ads, or services?

If I can’t explain the business to a 10-year-old in under 2 minutes, it’s too complex to invest in. Simplicity and clarity are key when evaluating a company.

Example: Visa (V)

Visa operates a payments network, connecting banks, merchants, and consumers. Every time you swipe your card, Visa takes a small fee for processing the transaction.

It’s a beautiful business model:

Asset-light (they don’t take on credit risk)
High-margin, recurring revenue
And it scales globally with every transaction made

Understanding how Visa makes money is straightforward, and that clarity gives you confidence when analyzing the business.

2. Do I Understand the Company’s Products & Services?

If you can't explain what the company sells in a couple of sentences, you likely don't have an edge.

Are the products easy to understand?
Would you use them yourself?
Are they solving a real problem or just chasing trends?

Example: Costco (COST)

Costco’s business is simple and brilliant: sell everyday products in bulk at low margins to loyal customers who pay an annual membership fee. The membership model creates steady cash flow and customer loyalty.

The clearer the product offering, the easier it is to evaluate the company’s competitive edge.

3. Are the Products Complementary or All Over the Place?

A focused business model is a good sign. When companies expand, it’s best when they build around their strengths, not stretch themselves thin chasing unrelated markets.

Do new product lines strengthen the core?
Is the company doubling down on what it does best?

Example: Apple (AAPL)

Apple builds complementary products: iPhones, iPads, Macs, AirPods, all tied together with services like iCloud, App Store, and Apple Music. Their ecosystem locks customers in.

Now, compare that to a company suddenly moving from energy into e-commerce, not so focused.

4. Revenue Split – Where Is the Money Coming From?

You want to understand the composition of revenue:

What % comes from core products vs newer segments?
Are there any areas in decline?
Is the company over-reliant on one customer or product?

Example: Amazon (AMZN)

Amazon’s retail business generates massive revenue but low margins. Meanwhile, AWS (Amazon Web Services) makes up a smaller % of revenue, but contributes a huge share of profits.

Lesson: Not all revenue is created equal.

5. Geographic Segmentation

Understanding where a company earns money matters:

Are they domestic-focused or global?
Are they exposed to high-risk regions?
Are they benefiting from international expansion?

Example: LVMH

LVMH generates significant revenue from Asia, particularly China, where luxury demand is high. Political or economic shifts in that region can directly impact earnings.

Geographic diversification can reduce risk, but it also brings currency, regulatory, and political exposure.

6. Will This Company Be Relevant in 10 Years?

This is one of my favorite questions. It forces you to think long-term:

Is the business riding a tailwind (e.g., cloud computing, digital payments)?
Are they vulnerable to technological disruption?
Do they have a moat that will protect them in the future?

Example: Mastercard (MA)

Even if cash disappears, Mastercard benefits because it powers digital transactions globally. That’s a long-term tailwind with a strong moat (brand, network, trust).

⚠️ Red Flag: A company earning today but stuck in a declining industry (e.g., print newspapers, cable TV) or prone to disruption by new technology.

7. Understand the Industry & Competitors

Finally, step back and zoom out:

What industry is the company in?
Who are its top 3 competitors?
What differentiates it? (Price? Brand? Tech? Network effect?)
Are margins improving or compressing across the industry?

Example: Medpace (MEDP)

Medpace operates in a competitive clinical research organization (CRO) industry. What sets them apart? Strong niche focus and high return on invested capital, showing they manage capital better than peers.

Looking at competitors helps you understand:

Whether the company has pricing power
If the industry is attractive overall
How much room is left to grow

Final Thoughts

If you want to analyze companies like a pro, don’t just look at ratios and numbers; understand the business.

Here’s a quick checklist to guide your research:

What do they sell, and to whom?
Is the business focused or scattered?
What are the revenue and geographic splits?
Will it still be relevant in 10 years?
What industry are they in, and do they dominate it?

Great investments start with great businesses. And great businesses are built on strong, focused, and sustainable business models

👉 Up next in the series: We’ll break down moats and competitive advantages how to spot companies with real staying power.

About Me

I am a self-taught investor who has read hundreds of books on investing and spends 40+ hours a week researching and analyzing stocks. Steady Investing has a true passion for investing and helping other investors.

I did not come from a finance background, and it took me nearly 10 years from first learning about the stock market to finally making my first investment. Since 2022, when I started tracking my performance, I have beaten the S&P 500 Index every year on average by 20 %+ and have achieved a 35 %+ compound annual growth rate (CAGR) vs 7 % for the S&P 500 Index, which is outperforming the market by 25 %+.

I created this platform to share my investing journey and help others navigate the stock market with confidence.

Let’s grow together. 🚀

Visit my page to access previous posts.

Disclaimer: This post is for educational purposes only and should not be considered financial advice. Always do your research before making investment decisions.

The Steady Investing

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