This document provides an overview of industry and company analysis. It discusses analyzing industries based on their lifecycle stage, characteristics like demand trends, competitive forces, and government regulations. Company analysis involves evaluating financial statements like the balance sheet and income statement to calculate key ratios regarding liquidity, profitability, leverage, and efficiency. Other factors like market share, capacity, and order book position also impact company performance. Risk assessment examines the degrees of operating and financial leverage to understand variability in profits from changes in sales.

1. CHAPTER NO: 05
INDUSTRY AND
COMPANY ANALYSIS
By: Ms. Paras Channar

2. Lecture outline:
 Introduction to industry analysis.
 Concept of Industry.
 Industry Lifecycle.
 Industry Characteristics.
 Company Analysis.
 Financial Analysis.
 Analysis of Financial Statement.
 Assessment of Risk.
 Other Variables

3. Introduction to Industry Analysis
 Industry analysis refers to an evaluation of the
relative strengths and weaknesses of particular
industries.
 An investor invest his money in the securities of
one or more specific companies, influence the
fortune of the
industry to which it belongs.
Concept of industry:
Describe as homogenous group
of companies, producing reasonable
similar products which serve the same need of
common set of buyers.
Analysis
Compan
y
Analysis
Industry

4. Industry Life
Cycle:
By: Julius Grodinsky
According to theory, industry life cycle is divided
into four stages:
Pioneering Stage: This is first step in industrial
life cycle of new industry where the technology
and product is not fully reached at market, but
have great opportunity to increase profitability of
industry having high demand for industry output.
(Sunrise Industry)
Expansion Stage: Once an industry has
established itself enter into expansion stage, each
company find a market for itself and develop its
own strategies to sell and maintain its position in
the market. the competitor charge low prices at
improved product. Investor can get high return with
low risk because demand exceed supply.
Stagnation Stage: the growth of industry became
stable, sales may be increasing but at slow rate,
two reasons, change in social habits and
development of improved technology. (Black &
white Television Industry)
Decay Stage: No longer demand for industrial

5. Industry Characteristics:
 Demand Supply Gap: the demand for a product usually tends
to change at a steady rate, whereas the capacity to produce the
product tends to change at irregular intervals, as result, an industry is
likely to experience under supply and over supply. Excess supply
reduces the profitability or vise versa.
 Competitive conditions in the industry: industries are
compete by five forces: barriers to entry, threats of substitution,
bargaining power of the buyers, bargaining power of suppliers, and
rivalry among competitors.
 Permanence: it is phenomenon related to product to the
technology used by the industry.
 Labor Condition: labour union are very powerful. If the
labour in a particular industry is rebellious and is inclined to
resort to strikes frequently, the prospects of that industry
cannot become bright.

6. Cont:…..
 Attitude of Government: the government may encourage the
growth of certain industries and can assist such industries through
favorable legislation, on contrast, the government may look with disfavor on
certain other industries too, like alcoholic drinks and cigarette industries.
 Supply of raw material: the availability of raw material is
key factor determining the profitability of an industry. Some Industries
may have to depend on a few manufacturers within the country or
imports from outside the country for their raw material supply.
 Cost Structure: cost structure of the industry, like factory cost, fixed
cost, variable cost, labour cost.

7. Company Analysis
 Company analysis deals with the estimation of
return and risk of individual shares, forecast the
future earnings of the company because there is
strong evidence that earning have a direct and
powerful effect upon share price .
 Companies information is divided into two broad
group:
 Internal Information: include annual reports to
shareholders, public and private statement of officers
of the company, the company financial statements
etc.
 External Information: information are those generated
dependently outside the company, these are prepared
by investment service and financial press.

8. Financial Statements
“Assignment for next class”
 Balance Sheet
 Income Statement/ Profit and Loss Account

9. Analysis of Financial Statement
“Assignment for next class”
 Ratio analysis help an investor to determine
the strength and weakness of the company.
 Liquidity Ratio
 Leverage Ratio
 Profitability Ratio
 Activity or Efficiency Ratio

10. Liquidity Ratio
The current ratio is a popular financial ratio used to test a
company's liquidity (also referred to as its current or working
capital position) by deriving the proportion of current assets available to
cover current liabilities.
The concept behind this ratio is to ascertain whether a company's short-
term assets (cash, cash equivalents, marketable securities, receivables
and inventory) are readily available to pay off its short-term liabilities
(notes payable, current portion of term debt, payables, accrued expenses
and taxes). In theory, the higher the current ratio, the better.
1.Current ratio = Current Asset
Current Liability
2.Quick Acid Ratio=Current Assets – inventory- prepaid
expenses
Current Liability

11. Profitability Ratio
 The different measures of
corporate profitability and financial performance.
These ratios, much like the operational
performance ratios, give users a good
understanding of how well the company utilized its
resources in generating profit and shareholder
value.
The long-term profitability of a company is vital for
both the survivability of the company as well as
the benefit received by shareholders. It is these
ratios that can give insight into the all important
"profit".

12. Leverage Ratio
 These ratio is also known as capital structure
ratio. they measure the company ability to
meet its long term debt obligations. They throw
light on the long term solvency of the
company. The ratios are
 Debt – equity ratio = Long term debt/ shareholder equity
 Total debt ratio = total debt/ total assets
 Proprietary ratio – shareholder equity/ total assets
 Interest coverage ratio = EBIT/ Interest

13. Activity or Efficiency ratio
 This is also known as turn over ratio. this ratio
measure the efficiency in assets management.
They express the relationship between the sales
and the different types of assets, showing the
speed with which these assets generate sales.
The ratios are;
 Current assets turnover= sales/ current assets
 Fixed assets turnover= sales/ fixed assets
 Total assets turnover = sales/ total assets
 Inventory turnover= sales/ average inventory
 Debtors turnover= sales/ average debtors

14. Other Variable affect on Company
Performance:
 Company market share
 Capacity utilization
 Modernization and expansion plan.
 Order book position
 Availability of raw material

15. Assessment of Risk:
 The variability in return arises primarily
because of variability in sales. The sensitivity
of profits to changes in the level of sales is
measured by a ratio called Degree of total
leverage (DTL). This ratio is used to measure
of risk.
 DTL = contribution
Profit before tax (PBT)

16. Cont..
 Contribution denotes sales minus variable cost
 DTL is sub divided into Degree of financial
leverage (DFL) which arise from the capital
structure of the company and Degree of
Operating Leverage (DOL) which arise from
the cost structure of the company.
 DOL measure the % change in EBIT for a 1
percent change in sales and is compounded
as;
 DOL = Contribution/ EBIT

17. Cont..
 DFL measure the % change in PBT for a one
percent change in EBIT and is compounded
as;
 DFL= EBIT/ PBT
 The degree of total leverage is the product of
DFL and DOL measure the percentage change
in PBT for a one percent change in sales.