week 2 | industry & business analysis Flashcards
describe regulations S-K
- Requires a description of the general development of the business of the registrant during the past 5 years, or such shorter period as the registrant may have been engaged in business
- Requires a narrative description of the business done & intended to be done by the registrant & its subsidiaries, focusing upon the registrant’s dominant segment or each reportable segment about which financial info is presented in its FSs
what do you do to understand a business?
Using plain English
- Articulate how the company makes money
- Identify the type of economic frictions the company addresses in the economic system
describe swot analysis
tool used to evaluate a business or project by looking at four key areas
internal:
- strengths
- weaknesses
external:
- opportunities
- threats
analyze competitive advantage (questions to ask)
- Does the company actually have a competitive advantage → what factors explain it?
- Is the competitive advantage sustainable?
- If the company has no competitive advantage → management have a plan to develop a sustainable competitive advantage to be implemented in an acceptable period of time & w/ a reasonable amount of investment?
- Can they make more returns compared to.
competitors
- Can they make more returns compared to.
how to achieve competitive advantage
Barriers to entry
- Patents (pharmaceutical - medicine), copyrights & other legal protections
- Regulatory & licensing barriers
- Scarce resources → can charge higher prices (diamond company)
Product/Services differentiation
- Technological innovation & Product design
- Marketing, distribution, & after-sale customer support
- Market segmentation
Cost leader
- Access to low-cost raw materials/labour
- Manufacturing or service efficiency
- Manufacturing scale efficiencies
- Greater bargaining power w/ suppliers
- Sophisticated IT systems
what things do we consider under a business model?
Business Description
Competition
Product and/or Service
Customers
Supplier
Ownership
Governance & Management
what are the two types of ratio comparison & whats the purpose
Time-series comparison (Horizontal Analysis) & Cross-sectional comparison (comparative analysis → comps)
One purpose is to forecast future
Ratios tend to mean-revert
- Unusually high → tend to fall
- Unusually low → tend to rise
- Caveat → general empirical pattern for many ratios in a large sample of firms
- The speed & completeness depend on the ratio & the specific firm
describe Time-series comparison (Horizontal Analysis)
- Comparing ratios w/ levels in prior periods
- Normal vs abnormal → identifying changes in performance & detecting the underlying cause
- Triangulate the ratios w/ structural changes
describe Cross-sectional comparison (comparative analysis → comps)
- Comparing a firm’s ratios w/ competitors
- Triangulate the ratios w/ corporate strategy
what is common size analysis
- vertical statement
- All F/S accounts expressed as % of 1 account
- Revenue & Assets
- scale everything in FS
advantage of common size
allows meaningful comparisons…
- Overtime while “controlling” for changes in firm size (measured as either sales or total assets)
- For firms using different currencies
- Between firms
caution in common size analysis
changes in expenses may not be directly related to change in sales
- Dig deeper to understand reasons underlying changes
describe percentage change
horizontal statements
- Amounts expressed as a percentage of a base year (fixed or rolling)
- Focus is on growth in each item over time
caution with percentage change horizontal statements
small (immaterial) accounts, especially on the BS, can often be associated w/ huge percentage changes
- Doesn’t mean they are important
best practices: 3 options for BS accounts
Using only beginning balance
Using only ending balance
Using both
