5.5 company analysis: past and present Flashcards
The guideline framework for analysts to follow when writing company research reports has three parts:
- Company Analysis: Past and Present
- Industry and Competitive Analysis
- Company Analysis: Forecasting
The first part of the foundational component of the guideline framework for industry and company analysis is to determine what?
a company’s business model
Bottom-up revenue analysis
looks at the key factors driving a company’s overall revenue.
Because revenue is the product of how many sales a company makes and the amount it charges per sale, a bottom-up analysis may focus on unit sales and pricing.
Another bottom-up approach to revenue forecasting is to look a revenues by segment, product line, or geography.
top-down approach to revenue analysis
begins by looking at macroeconomic or industry-level factors.
Industry size and market share are key top-down revenue drivers because a company can increase sales by either increasing its market share of a static industry or by maintaining the same share of a growing market.
Projections of industry-level growth may be based on macroeconomic drivers such as GDP growth and interest rates.
A company has pricing power if
if it is able to increase its prices without negatively affecting its sales volume
One of the main determinants of pricing power is market structure. For example, a monopolist has more ability to increase prices than a company operating in a monopolistically competitive market.
Another key factor driving pricing power is a company’s competitive position in its industry. The leading firm in a monopolistically competitive market likely has more pricing power than its competitors with smaller market shares.
price takers
firms operating under perfect competition
they have no pricing power and must sell for the market equilibrium price that has been determined by supply and demand.
Firms can increase their short-term profitability by reducing production costs.
However, a firm is unlikely to be able to sustain a low-cost production advantage over the long-run unless it enjoys the benefit of operating as a monopoly.
Firms in perfectly competitive markets have no pricing power because their products are homogenous. Customers have no incentive to pay more than the market price because all products are perfect substitutes for each other
commoditization
reduces pricing power
when competitors imitate innovations that make a product distinct.
Operating costs
related to sales generated in the current accounting period.
A company incurs operating costs by purchasing raw materials, transforming raw materials into finished goods, marketing finished goods, and delivering its products to customers
There are several ways to organize and classify operating costs.
Behavior with output: Whether the cost is proportional to output in the short run (e.g., variable or fixed).
Nature: What the cost has been incurred for (e.g., raw materials, rent, compensation).
Function: The cost’s purpose (e.g., COGS, SG&A, R&D, depreciation/amortization).
contribution margin
revenues - VC
The first step in reviewing a company’s capital investments is to:
a) evaluate management’s investments.
b) identify operating cash flow drivers.
c) determine the major sources and uses of cash.
c) determine the major sources and uses of cash.
Consider two companies that operate in the same line of business and have the same degree of operating leverage: the Basic Company and the Grundlegend Company. The Basic Company and the Grundlegend Company have, respectively, no debt and 50 percent debt in their capital structure. Which of the following statements is most accurate? Compared to the Basic Company, the Grundlegend Company has:
A
a lower sensitivity of net income to changes in unit sales.
B
the same sensitivity of operating income to changes in unit sales.
C
the same sensitivity of net income to changes in operating income.
B
the same sensitivity of operating income to changes in unit sales.
Grundlegend’s degree of operating leverage is the same as Basic Company’s, whereas Grundlegend’s degree of total leverage and degree of financial leverage are higher.
Which of the following is the most accurate verbal description of the degree of total leverage? The degree of total leverage is:
A
the percentage change in net income divided by the percentage change in units sold.
B
the percentage change in operating income divided by the percentage change in units sold.
C
the percentage change in net income divided by the percentage change in operating income.
A
the percentage change in net income divided by the percentage change in units sold.
