If you contribute to your employer’s 401k or receive equity awards, you may occasionally find yourself struggling with understanding how the value of your employer’s stock can affect your wealth and overall financial independence plans.

And, if you do, then know that you’re not alone.

In fact, this was an issue that Craig, a highly-skilled software engineer, faced as he was considering his overall financial situation.

Now, Craig worked at a cutting-edge technology company called IniTech, which specialized in developing innovative software solutions for a wide range of clients. And, in addition to a generous salary, Craig received a sizable portion of his annual income in the form of equity compensation, a common practice among tech companies, to attract and retain top talent.

Although Craig was handsomely compensated, he found himself perplexed by the complexities of equity-based compensation. While he knew that the value of his company stock played a significant role in his overall wealth, he lacked a clear understanding of all the factors that drove the stock’s value. As a result, Craig felt indecisive about whether to hold onto his concentrated company stock or whether to diversify his holdings to reduce his investment risk exposure and preserve his wealth.

Finally, one day after a watercooler discussion with a coworker that left him baffled about what was happening with his equity compensation, Craig decided that he needed to take control of his financial future by gaining a deeper understanding of what was happening with his company stock.

He believed that by comprehending the dynamics of the industry, he could better predict the near- and long-term value of his wealth. Through diligent research, Craig discovered that several factors impacted IniTech’s competitive landscape, including market share, barriers to entry, and disruptive technologies. That’s when he realized that by staying informed about these factors, he could make more informed decisions about his company stock.

Craig also learned that evaluating his employer’s earnings releases was essential in understanding the financial health of IniTech. That’s why he began to closely follow the company’s quarterly and annual reports, paying particular attention to key data points such as revenue growth, earnings per share, and executive guidance for future performance.

And as Craig dug deeper into his company’s financials, he realized that it would be beneficial to seek the expertise of third-party research to obtain an objective perspective on the value of his company stock. That’s because Craig understood that being an employee of IniTech might inadvertently introduce bias into his analysis, making it difficult for him to impartially assess the stock’s value.

In the end, Craig’s efforts to educate himself about IniTech’s competitive environment and financial health, coupled with the objective insights provided by third-party research, empowered him to make well-informed decisions regarding his equity compensation. With a clearer understanding of the factors driving the value of his company stock, Craig could now confidently decide whether to hold onto his concentrated stock position or diversify his holdings to reduce risk exposure and preserve his wealth.

Internal Drivers of Company Value

Now, what Craig’s story is meant to drive home is that, all too often, individuals receive an equity award with the hope that their company’s stock will simply go to the moon.

But what if it doesn’t?

That’s why if you’re serious about leveraging your company stock to create your own path to financial independence, you’ll need to understand what your company stock is worth and the critical factors that can drive its price either higher or lower.

So, what is a stock worth?

Well, the value of a stock ultimately comes down to what a buyer is willing to pay for the ownership of a given firm. Over the long term, the price of a stock is primarily driven by future earnings expectations of the underlying company. And in the near term, it can be influenced by company-specific factors, like corporate leadership, industry developments, and broader changes in laws and the economy.

So, with so much space to cover regarding stock valuation, where should a newly initiated do-it-yourself stock analyst begin? Well, if you know nothing else about the value of your company stock, the very least you can do is begin by understanding your company from the inside-out. 

Understanding the Role of Corporate Leadership

To start, take the time to better grasp the vision and values of your company and how your leadership team intends to take you there. This approach is essential because even the most well-funded, well-positioned firms can experience a slow death when executives fail to crystalize a vision for their organization, eventually leading to costly near-term tactics at the expense of a profitable long-term strategies.

And, so, how do you gain this understanding?  Well, as a corporate insider, one of the most essential ways for you to gain insight into your company’s vision and direction is by attending corporate town hall meetings. 

Indeed, attending a corporate town hall can be an excellent way for you to better understand market conditions and industry trends that can impact your firm and ultimately your stock’s value. That’s because during a town hall, leadership within the organization will likely provide updates on your company’s financial performance, growth initiatives, and market positioning.

For example, if your company is investing in new technologies or expanding into new markets, this may indicate an expectation by leadership of growth in those areas. And if your company is cutting back on its workforce headcount, or exiting markets altogether, it could be a sign of potential negative developments to watch.

What’s more, attending a town hall can provide you with an opportunity to ask questions and engage with company leadership. This can help you better understand the factors driving the company’s performance and growth prospects. And by engaging with company leadership, you can also gain insights into the company’s culture and values, which can have a long-term impact on earnings performance and stock value.

Now, attending a corporate town hall is just one way to get an insider’s view on the direction of your company and its earnings potential. So, if your company doesn’t host town halls, or does so infrequently, what you should do is pay attention to the specific messaging that your leadership is communicating during your weekly or bi-weekly team meetings.

Indeed, by staying informed and engaged with company leadership, you can be better equipped to make more informed decisions about your equity awards. That’s because, at a basic level, this knowledge can help you understand the company’s strategic vision, growth prospects and more crucially, potential changes coming down the pipe.

Influence of Large Shareholders

Now, another critical component to understanding the driving value of your company’s stock is knowing who the largest shareholders are. This knowledge is essential because large shareholders can often have a significant influence over your company’s decision-making processes.

Indeed, if you understand who these shareholders are, you may be able to better anticipate the direction your company will take and how it might affect your overall equity compensation.

How so?

Well, large shareholders may have a significant impact on the stock price of your company because they have a vested interest in the company’s performance. 

For example, if your company is a poor performer, a large shareholder may push for significant changes that could affect not just your compensation but your job security as well. And if a large shareholder decides to sell their shares, it could cause the stock price to drop and the value of your net worth along with it.

Finally, understanding who the largest shareholders of your company are can be essential if you are considering your own exit opportunities. That’s because if a potential buyer or investor is looking to acquire your company, then understanding who the largest shareholders are, and what their priorities may be, can help you make more informed decisions about whether to divest your own shares or to hold on for the long-term.

External Drivers of Company Value

So, now that you have a basic idea of how the value of your company stock is influenced by company leadership and by large stakeholders who have a direct or indirect say in the direction of your firm, let’s take a moment to discuss the external factors that influence the earnings potential of your firm, and hence the potential value of your stock award.

Porter’s Five Forces

Now, one way to understand how external factors can influence the value of a company is through the lens of Porter’s Five Forces.

So, what is Porter’s Five Forces?

Well, it’s a model that helps businesses understand the five critical factors that affect the competitive landscape they operate in and was developed by Michael Porter, a Harvard Business School professor.

Now, while there is much to be said about each of the five factors individually, at a high level, it’s critical to understand that the value of your company’s stock can be affected by these forces in a few ways. 

For example, if you work for a company that operates in an industry with high barriers to entry, then it likely can reduce the threat of new entrants and increase your firm’s profitability, which, in turn, can increase the value of your stock award. In a similar way, if your company operates in an industry with strong bargaining power over and buyers and suppliers, it can increase profitability and the value of your company’s stock.

On the other hand, if your company operates in an industry with high rivalry among existing competitors or many substitute services exist, it can reduce profitability and the value of your company’s stock.

What’s more, if your industry faces disruptive changes or the emergence of new technologies alter the dynamics of your industry, it can have a significant impact on your firm’s bottom line.

That’s why a company’s success or failure to navigate these forces can have significant implications for the value of your company’s stock and ultimately your equity compensation.

Understanding the Core Product and Offering 

Now, while there is much that can be said about how a firm positions itself in an ever-changing competitive landscape, two areas where your company leadership has some control in how they drive earnings include 1) how they position their product and services in the marketplace and 2) the clients they choose to serve.

By understanding the trends in these two factors, you can get a high-level sense of where your company may be headed and, more importantly, the future value of your company’s equity. 

Indeed, from a product and services perspective, understanding your company’s core offerings is essential because it can help you gain an insight into whether your firm is delivering on its vision, values and goals.

That’s because a firm’s vision, values, and goals serve as the foundation for its product positioning strategy. As you’ll likely recall, a vision statement outlines your firm’s long-term aspirations and defines what it wants to achieve in the future. A firm’s values, on the other hand, reflect its principles and beliefs, which can guide its actions and decisions. And goals provide a clear roadmap for the firm to achieve its vision.

So, how do these three elements fit together? Well, without a clear alignment between your firm’s offerings and its vision, values, and goals, your employer may struggle to identify its target market and develop an effective product roadmap that meets customer needs.

That’s why if your firm positions its products and services in a way that contradicts its values, it can damage its brand image and reputation. And, ultimately, a misalignment between your firm’s offerings and its vision, values and goals, can lead to poor earnings performance.

For example, a company that prides itself on sustainability and environmental responsibility should not offer products that harm the environment. And so, if a firm positions its products and services in a way that does not align with its vision, values, and goals, it risks losing customers and damaging its brand image. That’s because customers are more likely to be loyal to a brand that aligns with their values, and a misalignment can cause customers to ultimately lose trust in the firm.

Another way that a misalignment can lead to poor earnings performance is by a lack of differentiation from its competitors. What this means is that if the company you work for positions its products and services in the same way as its competitors, then it likely will struggle to stand out in the marketplace.

And that’s because differentiation is crucial in a competitive landscape, and a firm that does not differentiate itself through its vision, values and goals risks losing market share. And, a decline in market share can lead to lower corporate earnings, and hence, threaten the value of your company’s stock.

Who are the largest clients?

Now, another factor to consider when it comes to the earnings ability of your employer and hence the value of your stock award is your firm’s target market and its largest clients.

So, why should you care about who your company’s largest clients are?

Well, understanding who your biggest customers are can help you gain better insights into the competitive landscape, your company’s strengths, and weaknesses, as well as how your employer is positioning itself in the marketplace.

Indeed, the biggest customers of a company often generate a significant portion of its revenue. Therefore, if you understand who your biggest customers are, then you may be able to better understand your company’s financial stability and prospects for growth.

From this perspective, having some insight into who your biggest customers are can help you better understand their needs and preferences. This perspective can be a critical insight because it will tell you whether internal product development, marketing, or customer service initiatives are aligned with what your most valuable clients want, and your firm’s ability to deliver products and services that meet their needs.

Again, when there’s misalignment, there’s a chance that a new entrant into the marketplace could entice your firm’s largest customer away to their firm, potentially dealing a blow to future earnings and revenue growth.

Financial Metrics and Your Company’s Stock Value

A final component for understanding your company’s value and how it may affect your stock award is actually taking a deep dive into its financials. 

That’s because looking into the financials can help you know if your company is well-funded and has rising revenues, or on the other hand, whether your company is underfunded and revenues are in decline. And central to this insight is understanding corporate earnings.

So, what are corporate earnings?

Well, a company’s corporate earnings refer to its profits after all expenses and taxes have been paid. When a company’s earnings increase, it usually means the company is doing well and its stock price may increase. On the other hand, if a company’s earnings decrease, its stock price may also decrease.

Evaluating Your Firm’s Financials

As you’re evaluating your employer’s corporate earnings from one quarter to the next, there are a variety of fundamental factors that you should consider, the first of which is revenue growth. 

Revenue growth is the lifeblood of a company. If your firm’s revenues are consistently increasing, it’s a good sign that the company is on a solid growth trajectory. However, if revenue growth is stagnant or declining, it may indicate that the company is facing challenges in growing its sales metrics.

And while revenues are important, as the old saying goes, it doesn’t matter how much you make, but how much you keep. And this is where profitability comes in. Now, this metric can be challenging to evaluate at times, especially if your company is still pre-IPO or in an early-growth phase. Even so, it’s essential to look at your company’s net income and gross margins over time to evaluate whether these metrics are growing.

That’s because if your company is consistently profitable, it’s a good sign that your firm is well-managed and has a sustainable business model. If operating expenses are increasing faster than revenue, it may indicate that the company is not managing its expenses effectively, which could impact future earnings. However, for early-growth companies, if profitability is low now due to increased expenses, you’ll need to evaluate whether this comes from investment outlays in the present that may set your company up for future growth down the road.

Another key factor to consider from a financials perspective is how your firm is funding its operations. For example, when a company issues new shares of stock to large investors to fund operations, it can dilute the firm value to existing shareholders. This means that the value of your stock award may decrease if the company issues new shares. However, if your company’s earnings increase as a result of issuing new shares, the value of your stock award may also increase as well.

And, finally, as you’re evaluating your firm’s financials, what you’ll want to consider is the trends in these key metrics. Ask yourself whether your firm is increasing revenue over time, whether rising expenses can be justified with respect to future potential sales growth, and whether additional external funding will benefit your company’s long-term prospects and hence its expected future share price.

Earnings and Competitor Analysis

And while reviewing trends in your firm’s financials certainly is useful, comparing results to industry competitors can often provide more insight into whether your company is ultimately delivering increasingly higher value to shareholders, including yourself.

You can do this by taking a moment to review the financials of your firm’s top three competitors. Then, as you do the work, consider the competitive landscape, industry- and company-specific factors and market trends, to evaluate how they may be affecting your company’s share price.

For instance, when it comes to the competitive landscape, take the time to identify your company’s main competitors, and evaluate how they’re performing. Then ask whether they’re gaining market share or losing it. What are their strengths and weaknesses, and how does your company compare? By asking these questions, you’ll not only gain better insights into the competitive landscape, it can also help provide valuable awareness into your company’s relative performance.

Now, depending on the industry, there may be specific factors that affect financial performance from one industry to the next. For example, in the technology industry, innovation and R&D spending may be critical to maintaining a competitive edge, especially for early-stage companies in their high-growth phase. In contrast, earnings for firms in the pharmaceutical industry likely will be affected by factors like regulatory approvals and patent expirations.

And with respect to market trends in the competitive landscape, ask yourself whether sales and profits are growing across the industry, or whether they’re in decline. If the industry is growing, it’s important to consider whether your company is keeping up with the overall industry growth rate. And, if the industry growth rate is declining, it’s also essential to consider whether your employer is able to maintain its respective market share and profitability in such an environment.

Finally, it’s critical to take a long-term view when evaluating the performance of your company and its competitors. Consider the industry trends and the competitive landscape over the next several years. And then ask yourself, “how is my company best positioned to take advantage of opportunities and overcome challenges in the industry?” Based on your response, evaluate how your company’s strategy compares to its competitors in terms of its long-term prospects.

Overall, when evaluating the performance of your company and the competition in the same industry and marketplace, you should consider a variety of factors that can affect sales growth and ultimately, profitability.

Finding Your Employer’s Financials

So, with all this talk about performing a financial analysis on your company stock, you may be asking yourself, “where exactly can I find this information?”

Publicly Held Companies

Well, as a first step in evaluating your firm’s financials, you should check if the company you work for is required by law to disclose certain financial information.

If your company is publicly traded, it likely will file periodic reports with the Securities and Exchange Commission (SEC), which are publicly available and can be accessed in many cases through your company’s website or at the very least, through the SEC’s EDGAR database.

These reports contain financial statements and other information that can help you understand your company’s financial performance and its financial prospects.

Privately Held Companies

Now, if your company is pre-IPO or privately held, it may still be required to provide certain financial information to its shareholders or employees. You can check your employment contract or equity compensation plan to see if it includes provisions for the company to provide you with certain financial information, and if so, where you can find it.

One way to determine the value of your privately-held stock award is to review your firm’s latest 409a valuation. Now, a 409a valuation is a type of valuation performed for privately held companies to determine the fair market value of your firm’s common stock. This valuation is a filing more often than not required by the Internal Revenue Service (IRS).

And a 409a valuation typically involves an independent valuation firm, which will consider a range of factors when determining the fair market value of your company’s common stock. These factors may include the company’s financial performance, growth prospects, market conditions, and the value of comparable companies.

Now, if your company is not legally required to disclose financial information in a public way, you can try to request financials from your company directly. To do this, try speaking with your manager or human resources department to see if there is a process for obtaining this information. If there is no established process, in certain instances, you could request a meeting with a senior executives and, depending on your standing with your firm, discuss your concerns and request additional information at that time.

Now, it’s critical to keep in mind that privately held companies may not provide the same level of financial disclosure as public companies, therefore, it may be more difficult to obtain accurate and up-to-date financial information. And in some cases, you may need to rely on other factors, such as the company’s industry and market conditions, to estimate the value of your stock award.

Third-Party Analyst Evaluations

One final way to better understand your company’s financials and what it may mean for the value of your stock award is to review analyst opinions on the financial health of your firm. Indeed, reviewing third-party analyst evaluations of your company stock is essential because it can provide you with an independent perspective on the value of your company stock and its growth prospects.

These evaluations are typically conducted by financial analysts who specialize in researching and analyzing specific companies and industries and who also have access to a wide range of financial data and market trends. What’s more, third-party analyst evaluations can help you objectively understand the risks and opportunities associated with your equity awards and help you make more informed decisions about your company holdings.

So, where can you find these third-party reports?

Well, you can generally start your research by visiting financial news websites like Yahoo Finance or Bloomberg news. These resources can in many cases provide you with access to research reports and analyst ratings that offer valuable insights into your company’s financial performance and growth prospects.

Another option is to seek out research reports from your brokerage firm. That’s because many brokerage firms offer research reports and analyst ratings as a service to their paying clients. And if your broker offers such a service, then these reports can be another useful tool to use if you’re looking to stay up-to-date on the value of your company stock and market trends.

Now, if you’re really dedicated to understanding the value of your company’s stock, and want an objective opinion but don’t want to take the time to search for it, then in many cases you can work with an independent research firm to gain access to its reports.

Either way, gaining access to third-party research can save you a lot of time and hassle as you’re doing the work to better understand the value of your company stock.

What Drives the Value of Your Employer’s Stock?

We’ve covered a lot of ground here today in terms of the steps you can take to evaluate the value of your company stock and how it may ultimately affect your stock award. And, if you’re not sure where to start, take a lesson from Craig and how he applied some of approaches we discussed here today to better understand the value of his company’s stock.

To start, Craig’s journey to gaining a deeper insight of the value of IniTech’s stock was marked by first understanding whether the work his firm was doing was aligned with his leadership team’s vision, values and goals for the company.

Then, he took the time to explore the competitive environment to understand factors like market share, barriers to entry, and potentially disruptive technologies, that could significantly impact his company’s future earnings performance.

Next, Craig began to closely monitor IniTech’s earnings releases, evaluating crucial data points like revenue growth, earnings per share, and management guidance. This information helped him gain insight into the financial health of the company and assess its growth prospects.

Lastly, Craig utilized third-party research to obtain an unbiased opinion on the value of IniTech’s stock. By integrating external analysis with his own understanding of the company’s competitive landscape and financials, Craig was able to make more informed decisions about his equity compensation.

Taken together, these steps ultimately enabled Craig to confidently evaluate the benefits and risks associated with his company stock. And armed with a comprehensive understanding of IniTech’s earnings prospects and competitive position, Craig could now make a well-informed decision about whether to hold onto his company stock, or diversify his holdings as he took one step closer to becoming the master of his financial independence journey.