1. BUSINESS STRATEGY ANALYSIS
1.1.
1.1.1.
Industry Analysis
Actual and potential competition
a) Rivalry among existing firms
Profitability is low if competition for market share is strong:
-
Low industry concentration (number of firms & their relative sizes): industry is fragmented  price competition is
severe.
-
Low product differentiation: similar products.
-
Low switching costs: customers easy to change products.
-
Low industry growth
-
Large economy of scale
-
Steep learning curve
-
High portion of fixed costs
-
Excess capacity (capacity > demand), high exit costs.
b) Threat of new entrants
Profitability is low if threat of new entrants is high:
-
Small economies of scale:
-
Less first mover advantages: low brand loyalty…
-
Easy to access channels of distribution and relationships: many existing channels or low cost of developing new
channels
-
Low legal barriers: patents, copyrights, licensing regulation…
-
Less requirements of expertise/specialized knowledge
c) Threat of Substitute products
Profitability is low if threat of substitute products is high:
-
Price and performance function are similar
Low price & high performance: high threat
-
Customers are willing to switch
Products are similar or seen as being substitutes
Low brand allegiance
1.1.2.
Products are replaceable
Bargaining power in Input and output market
d) Bargaining power of Buyers
Low profitability if power is Strong:
-
More sensitive to price:
Products are similar
Low switching costs
Unimportant products (relative cost and quality)
-
Higher bargaining power:
Fewer buyers
High volume per buyer
Low switching costs
More substitute products
High threat of backward integration by the buyers
e) Bargaining power of Suppliers
Low profitability if power is Strong:
-
Few suppliers
-
High volume per supplier
-
High switching costs
-
High product differentiation
-
Importance of products in terms of cost and quality
1.2.
Competitive Strategy Analysis
1.2.1.
Cost leadership
Same product at lower price because of:
1.2.2.
-
Economies of scale, scopes, and learning
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Efficient production
-
Simpler product designs
-
Efficient organization processes
-
Lower costs of inputs and distribution
-
Little R&D or brand advertising required
-
Tight cost control
Differentiation
Unique product at a lower price than the price customers willing to pay:
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Superior product quality
-
Superior product variety
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Superior customer services
-
More flexible delivery
-
Investment in brand images
-
Investment in R&D and marketing
Organizational and control system must foster on creativity and innovation.
1.2.3.
1.3.
Mixture of Cost Leadership and Differentiation
Corporate Strategy Analysis
2. ACCOUNTING ANALYSIS

Degree accounting captures underlying business reality.

Appropriateness of policies and estimates.

Distortions: identify and undo.
 Improve reliability of FS.
Annual reports:
+ Management Discussion and Analysis (MD&A): trends in sales, expenses, cash flow…
+ Financial statements: IS, SFP, CFS, SE
+ Notes.
6 STEPS:

Identify key policies and estimates: to measure critical factors and risks

Assess flexibility: allocation methods, estimate bad debts, inventory methods.
Flexibility // Informative // Distortion

Evaluate Accounting Strategy:

Evaluate Quality of Disclosure: adequate? Informative Explanation? UpToDate?...

Identify potential red flags: unusual transactions, unusual changes…

Undo distortions: make adjustments …
3. FINANCIAL ANALYSIS
3.1.
Return
ROE = Net income/Equity
ROA
3.2.
Profitability
Net margin
Gross margin
Operating margin
3.3.
Efficiency
Asset turnover = Sales/Total assets
Fixed asset turnover = Sales/Fixed assets
3.4.
Working capital
Working capital turnover
Working capital = current assets (cash, AR, inv…) + current liabilities (AP, short-term debts, current portion of
unearned rev…)
Inventories turnover, Days of inv on hand
Receivable turnover, Days of sales outstanding
Payable turnover, Number of days of payables
3.5.
Leverage
Leverage = Total assets / Equity
3.6.
Credit Risk
Liquidity ratios
Current ratio = CA/CL
Quick ratio (acid ratio) = (CA – Inv)/CL
Cash ratio = (CA – marketable securities)/CL
Solvency ratios
Debt ratios
Debt-to-Equity = Total debts / Total equity
Long term debt to equity
Total debts ratio = Total debts/ Total assets
Leverage
Coverage ratio
Interest coverage = EBIT/interest expense