Many times you may find yourself wanting to invest in a particular space and may even have it narrowed down to a few stocks your interested in. Now there is two schools of thought as to how to enter. You could use a chart to find the best opportunity for entry and possible targets. This is known as technical analysis. The second way is to take a longer term view and look more closely at the financial performance of the company to gauge weather you think it will do better or worse in the future. This is known as fundamental analysis.
Now you don't have to go crazy here and look at all the metrics. This would likely drive you crazy. You just want to get a close look at the performance of the company to see if you can identify with the analysts expectations or if you feel there may be a change in returns. Today we will look at one way to decide between two, almost identical companies, Avis
First of all both of these companies rely heavily on debt, and since we know this we will want to see who has the most financial leverage. First we look at Avis. This company has an operating margin of 8.4% while Hertz is at 8.7%. Now this doesn't tell us much but it does seem like the two companies are basically performing the same as it pertains to operating margin. We want to know who has the upper hand when it comes to borrowing money though. This is because without access to capital both companies would struggle to survive.
Drill down a little further and look at their net profit margin. Avis is at 1.9% while Hertz is at 0.20%. Why the large gap? Well this shows us quickly that Hertz' cost of capital is much higher and it eats into their profits quite severely. We can see that Avis' financial leverage is much better. This could be because they can borrow money much more efficiently or it could be that Hertz is paying more for debt due to the accounting irregularities that were discovered back in 2014. If you were lending to a company that wasn't clear on its numbers I'm sure you would charge them a little more too!
So with this quick analysis we can see that Avis stands out as the clear winner between the two. If you want to take it a step further you could go look at a chart and try to identify your best buy point should Avis pullback.
