A. Explain the uses of industry analysis and the relationship of industry analysis to company analysis

Question 1

How is industry analysis relevant to financial analysis?

Answer 1

Industry analysis is necessary for understanding a company’s business environment before engaging in analysis of the company. The industry environment can provide information about the firm’s potential growth, competition, risks, appropriate debt levels, and credit risk.

I. Industry analysis an important for company analysis because it provide
a framework for understanding the firm. Analysts will often
specialize in, that is focus on, a particular group of specific industries
so that by concentrating their attention and maintaining awareness
that is specific, they can better understand the business condition the
firms in those industries face.
– Understanding a firm’s business environment can provide insights about
the firm’s potential growth, competition and risks.
– Industries are often subject to the impact of specific factors and analyzing
a company properly requires understanding and recognition of these
factors.
– Industry conditions can help determine ability to meet obligations.

ndustry analysis is most likely to provide an analyst with insight about a company’s: pricing power.

Industry analysis provides a framework for an analyst to understand a firm in relation to its competitive environment, which determines how much pricing power a firm has. Competitive strategy and financial performance are aspects of company analysis.

Question 2

Industry Valuation

Answer 2

industry valuation can be used in an active management strategy to determine which industries to overweight or underweight in a portfolio.

In active management strategy, industry analysis can identify industries that
are undervalued or overvalued. This can help in selecting individual securities.
– Some investors engage in “Industry or sector rotation” which is
overweighting or underweighting industries based on the current phase of
the business cycle.
– Some investors may see short term tactical opportunities in individual
stocks, underpriced relative to value, and from this short term
perspective , may decide to depend less on industry analysis
considerations
– A company’s industry has been found to be as important as it home
country in projecting performance

A cyclical industry is one that is expected to outperform during an expansion and underperform in a contraction. The industry rotation strategy for a cyclical industry is to overweight during an expansion and underweight during a contraction.

Question 3

Industry representation

Answer 3

is often a component in a performance attribution analysis of a portfolio’s return.

Question 4

Industry Attribution Analysis

Answer 4

III. Performance attribution analysis ‐ sources of portfolio return are determined
relative to a benchmark. The industry representation within a portfolio is often
a significant component of attribution analysis