Today we are going to take a look at how a Consultant thinks and solves a problem. After this exercise, my goal is for you to understand that having a global perspective of the world is crucial when trying to become a good investor. Also, I hope that you follow this progress when evaluating companies:

  1. Evaluate the general market.
  2. Evaluate the isolated stock in the market.

We are going to go through a real case that I had when I participated in a workshop with a very famous American consulting firm.

Case Problem:

A family driven shipping company that’s been very profitable for more than 10 years suddenly starts to lose money. The owner of the firm can’t really see why this is happening, so you are hired to solve this puzzle.  Luckily, a guy called Stockles will provide you with some guidance so that the job becomes a bit easier. As a quick tip, he says that the market consists of three players, and you are one of them.

Problem-solving as a Consultant:

At the start, you will probably be thinking a lot of thoughts at the same time. You know that the problem is that you have a firm that is suddenly starting to lose money, but that can be for so many reasons. So, you ask Stockles for some guidance, and the kind guy that Stockles is, he tells you  to solve the problem in a structural manner. That always helps. He tells you to first look at the market as a whole before isolating your company.

The Market:

So, you ask yourself. What is the market? You know that a market consists of a buyer and a seller. You also know that the price is important because it will make the buyers and sellers behave differently. So you ask Stockles if something has happened to the price in the market of our company? Stockles says no.

Okay. So no price change. Then, if you lose money and the price hasn’t changed, it has to be the volume?! Right? Again, Stockles shakes his head. Strange you think. So basically, nothing has happened in the market, but still, my firm is losing money. This has turned into quite the puzzle.

The Company – Variable and Fixed Costs

The natural thing now is to move on to the company that you are helping. Here you know that cost is important for a firm, and you know that a firm can have variable costs as well as fixed costs. Since this is a shipping company, maybe the quantity of oil as a fuel has increased? Workers are demanding more pay? Maybe the rent of harbor parking has increased? After asking Stockles many questions on both variable costs and fixed costs, he tells you that neither is right. The costs of the company have not increased nor decreased.

The Company – Profits

This is getting hard. No price change. No volume change and no cost change. Still, the company is losing money. However, you know that you haven’t asked about profit, which can be divided into revenue and costs. You ask Stockles if profit is the right thing to ask for, and Stockles eyes starts to shine with joy. Boom! We are getting closer.


You know that there are several important things to know about when talking about profitability:

Gross Margin, Operating Margin, Profit Margin, FCF Margin, EBITDA Margin and so on. Unfortunately, Stockles says that you need to hurry now, so he gives you each company’s income statement. You do some calculations and figure out that company C has lower margins, and they lose a lot of money, so it can’t be them anyway. He also tells you that company B has lower prices on the product than you. However, Stockles gives you this paper (income statement)

Okay. Let’s take a look here. WTF!!!! You have higher EBIDTA than company B, and you still lose money. Stockles puts a hand on your shoulder  and tells you to breathe and think harder. So you do. You know that EBITDA means Earnings Before Interest, Taxes and Depreciation and Amortization. You figure out that the interest has to be the same for both companies (Stockles confirms).

Then you think about the depreciation and amortization. This is basically how much an object loses its value over time. Think about a car. As years pass, the car becomes less and less valuable, this is the same. However, you can’t understand that the ships are so different that the value-loss should make up for the change (you check this and Stockles says you are right).

Taxes <ight Turn Everything Upside Down

So, the only thing is Taxes. Remember, you started out with a company where neither any market change caused the total revenue to decline, and neither any cost problems within the company. At first, you say to Stockles that you know taxes differ, but they can’t differ so much. Most companies pay around the same taxes so this can’t be the reason, but then you see the light. You ask: Stockles, where is this other company from? Stockles answers it’s from China.

Different Tax System

Awesome. This is the answer and the whole point behind this weird blog post about consulting and taxes:

Companies that operate in the same industry can have very different terms regarding taxes. Even though costs are the same, prices and even volumes stay the same, one company can take profit from another just because a country (like China) has a very favourable tax system for Chinese shipping companies. No, it can’t last forever, and no, most of the time this “boost” goes away once the firm has been in the market for a while, but it can provide some negative effects in the market in the short term. It also makes it possible for some companies to have a lower selling price on its product and therefore generating lower profits than its competitors (without respect to taxes).

Consukting Conclusion:

The conclusion in this real case was that our company bought the Chinese company and thereby killed the opponent, and both companies where happy (Finding out if this was the right choice was the hard part about the case). The Chinese company was sold at a high price, and our company could keep going like it had done before (I had to neglect important parts of this case, but hopefully I made some kind of point). Think global, and when trying to analyse a company, first analyse the market before jumping into the stock. This way, you will get a broader understanding and be able to stay calm and patient.

Thanks for reading! I hope that you liked the post. If you did, please comment. I’m keen on writing a blog post about a private equity case, but I need to know if this article had any value to you.  Also, I appreciate if you click on the link beneath or click on one of my ads so that the expenses of this blog gets taken care for.

See you,


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NK · July 30, 2017 at 11:05 am

An enjoyable read! A top-down approach gives you valuable insight before narrowing it down to a company.

    Stockles · July 30, 2017 at 11:13 am

    Hi NK,

    Glad that you found the post enjoyable!

Richard · July 30, 2017 at 11:18 am

Very much appreciated! Thanks!

    Stockles · July 30, 2017 at 11:23 am


    Happy to hear that Richard!

Dividend Portfolio · July 30, 2017 at 12:30 pm

Hey Stockles,

It was a interesting read. Sometimes, you have to break down a problem bit by bit to get to the root of the problem. At times, that’s no easy task, but it’s very difficult to find the solution unless you can determine the root of the problem. Good stuff man.

    Stockles · July 30, 2017 at 12:40 pm

    Hi Dividend Portfolio,

    Yes. This is called a top-down approach. Start with the big picture before trying to narrow things down. If you started with the EBITDA you would have no chance to find the source of the problem.

    Thanks for always stopping by buddy!

Steveark · July 31, 2017 at 1:19 am

I retired a couple of years ago after a career running a large division for a Fortune 500 corporation. Now I am indeed a consultant, for entertainment and to keep my mind challenged, and I’d say that is a pretty fair depiction of how I think when I am doing the consultant thing. Oh, and you have to bill an outrageous fee and be from at least 100 miles away to be a consultant.

    Stockles · July 31, 2017 at 8:40 am

    Hi Steve,

    That´s really cool! Almost wierd to believe that someone who was running a large division for a Fortune 500 corporation is visiting my blog, but I guess that´s what internett is all about. Thank you for commenting and I hope to see you again!

      Steveark · July 31, 2017 at 7:07 pm

      Not at all, I’ve been interested in the FIRE movement and investing for a long time. I only slightly early retired because I enjoyed my job a lot. And I love being part of the side gig economy. I don’t need an income but I enjoy four profitable side gigs post retirement as well as 7 volunteer ones.

Stockles · July 31, 2017 at 11:13 pm

Hi Investacus,

Thanks for commenting. When I say lose money I do not mean that the total result is negative, but they got lower margins than before. So when one company could “win” on EBITDA, the other one actually turned out to be the “winner” due to tax decution from it´s country. In China, they have a very favourable tax system for small companies that try to compete against well establised firms.

You can take a look here on which tax system different countries uses:

    Investacus · August 4, 2017 at 7:33 pm

    Okej then I get it !

    So the growth is negative in the result, not the actual result are negative.

      Stockles · August 4, 2017 at 7:53 pm

      Correct! That would have been something. I will try to make it clearer 🙂

Mr. Robot · August 15, 2017 at 2:50 pm

Great article Stockles, thanks for sharing!

    Stockles · August 15, 2017 at 5:06 pm

    Hi Mr. Robot,

    Glad you liked it. Interested in a Private Equity Case too?

khan · August 31, 2017 at 11:13 am

thanks for the nice post

    Stockles · August 31, 2017 at 12:44 pm

    Hi Khan,

    Welcome to Stockles. Glad you liked the post. Feel free to ask any questions =)

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