Analyzes of Qualitative Aspects of a Company - Essay Example

?Q1 Qualitative Aspects of a company Qualitative aspects of a company are important to analyze due to its ive nature. All aspects cannot be quantified and given a numeric value therefore; it is essential for an individual to see which factors have the biggest say in devising a company’s outlook. Business Model  One of the integral components of a company’s performance is the route it takes to make money. If it is a manufacturing company then they make money through selling a product. Likewise if it’s a service company then they provide services to generate money. Models could be easy or difficult to understand depending on the company’s flow of transmission of value for consideration. The level of complexity in a model could be the deciding factor for investment by an investor. (Ritchie)Moreover, unless one comprehends a company's business model, one would not know what the drivers are for future growth, and he will leave himself susceptible to being blindsided. For instance, Warrant Buffet never invested in an IT firm because he was unable to comprehend their business model. Competitive Advantage  Another key aspect is the identification of company’s competitive advantage over others. An investor is particularly interested in long-term success of the company and to reach that he needs to know which element would keep the company’s performance better than others. For instance, Wall-Mart possesses competitive advantage in price of the product. It means that it provides the product in the lowest price and no competitor can beat them in a price war. Ultimately, if a company achieves competitive advantage, then its shareholders will be rewarded for decades. Management  A company cannot reach its objectives and cannot implement its business model if the leaders of the company fail to execute a plan. This information is present on the website of each company but it’s always sugar coated and one would not find anything useful on the site. Therefore, some ways to get a feel of management would be through a. Conference Calls- talk between CEO and CFO could reveal results. b. Management Discussion and Analysis (MD&A)- compare what management has said previously and what are they stating today. c. Ownership and Insider sales- If management holds share options then you have confidence that they will do well. d. Past Performance-identify companies CEOs have worked in the past and their performance. Corporate Governance  An important thing to analyze is the compliance of governance policies and applicable government regulations (such as the Sarbanes-Oxley Act of 2002) by the company. Corporate governance policies normally cover a few general areas: structure of the board of directors, stakeholder rights and transparency of financials and information. As an employee, it is imperative that these factors are taken into consideration. An employee as well as the organization would like to share similar values. If the organizational culture is based on honesty and integrity, then a person with unethical behavior would not sustain for long. Therefore, employees’ actions should be in-line with the company’s competitive advantage and core values to benefit him as well as the organization. Moreover, an employee should know before entering a firm about its business model. There may be actions by the company which are against the values of the employee. Before the burn gets exacerbated, preventive measures should be taken. Furthermore, employee should consider the style of leadership practiced in the organization. If the company follows a bureaucratic structure, then the employee should be prepared to work hard on flattering his/her bosses. These aspects are not given equal weight ages in every company. However, all these factors are always considered by company’s stakeholders before jumping on to the decision. From an employee’s perspective, management’s role should be the factor to be analyzed closely. Usually, employee turnover is caused neither because of company’s business model nor value resemblance rather it is caused by the difference of views of the employee with the management. Therefore, style of management should be studied carefully before jumping up to a decision. Q2. Qualitative aspects of the industry Customers Industry needs to analyze its targeted customers. There may be millions of it and there may be a handful. They need to target in such a way that a customer should not revolt to some one else. However, it might not be a good idea to rely on a few customers to earn your living as a loss of one could have substantially adverse effect on your earnings. Hence, it is essential to for a company to keep their customers happy and keep them high on their priority list. Market share Another key aspect to be noticed is industry’s major player and their hold on the industry earnings. A company enjoys high market share when it is financially sound. An industry may have high barriers to entry if a handful companies (3 to 4) own more than 70% share in the market. (McClure)Furthermore, these companies enjoy economies of scale due to their high magnitude of operations which adds to the misery of their rivals. The company can absorb the distress of high fixed costs in a capital-intensive industry and subsequently decrease price of the product to eradicate its competitor’s existence in the market. For instance, a company having 80% of market share would be playing much better beneficial games than that of 20% market share. Industry Growth Industry growth is essential to evaluate before entering into the sector. One needs to analyze whether the industry has the potential to grow in the upcoming years or the market is saturated. If the market is not witnessing new customers then the new entrant has to steal its rival’s market share by converting their customers in your favor which is elusive to perform. For instance, there is negative growth in cassette player’s market due to out-dated technology. Competition One of the key aspects in analyzing any industry is the level of competition. An industry with low barriers to entry will have a large number of firms which will make the operations for a new entrant sturdy. Moreover, if the industry is competitive then your hold on price is minimal. This power refers to the ability of a supplier to push costs on to customers. In an industry with fewer alternatives, you have the ability to pass cost to customers not the supplier. Regulation A check on the regulations is an important aspect. Usually if the industry has a monopoly and the product is an inelastic good, then the regulators keep a close eye on the prices and specify a profit margin. The company is not allowed to surpass that margin or they would be alleged with penalties. A good example of such an industry would be utility goods. As an employee, one should be familiar with all these aspects so as to contribute efficiently as well as effectively to the company. These analyses will help an employee plan his/her growth. These factors will decide a person’s worth in the industry. For instance, if there is an oligopolistic structure of the industry then the competitor will try their best to notch their rival’s star employees so that they could benefit from the culture and knowledge that employee possesses. In such a setup, employee value is extremely high and ethical roles come into direct play while dealing in such a scenario. Lastly, if one is a part of that company and if he is not familiar with the basic requirements and aspects of the industry, then he would be unable to serve as a lucrative input for the company. The weight given to each factor will differ from industry to industry but the general factor remains same. For perfect competition, low emphasis is on pricing power. However, if the industry is oligopolistic then significant value would be given on maintenance of pricing power. Q3. Net profit which is also known as accounting profit is derived after deducting business revenue from business expenses. If the business has more revenue than expenses, then accounting profits are realized. On the other hand, economic profit takes into account the opportunity cost of not taking a project as well. Economic profits are preferred by some analyst because it presents the hidden cost as well. It takes into account the trade-off of one deal over other therefore; critical analysis would always demand inclusion of economic profit analysis. For example, if you have two business opportunities A and B and you can chose only one from them. If you invested in option ‘A’, then the opportunity cost lost would be the return you would have got in case you had invested in option B. In the end if option A yielded $50,000 of income and option B yielded $60,000 of income then the opportunity cost of not investing in option B would be $10,000. Q4. DSO is not the only measure for a company’s financial soundness. Any company which has a DSO of 449.53 days is considered unprofitable if all the factors affecting the industry are not taken into account. There are many ratios which will help us analyze whether the company is in a good position or not. Some of ratios and John Deere's ratio calculations are given below: a) Return on Asset: 5.8% b) Return on Equity: 37.98% c) Asset Turnover: 0.7x d) Current Ratio: 2.0x e) Total revenue growth: 26.79% f) EPS growth: 120% g) Industry comparison (Bloomberg) These will indicate whether the company has been performing well or not. Moreover, when these ratios are compared to the industry, it is noticeable that the company’s performance is excellent in the industry it operates in. (Shim and Siegel) It is a top notch company in its respective field and a growing organization according to various analysts. Q5 Basic earnings power ratio This ratio indicates how effectively company is utilizing its assets to generate earnings. It is calculated by dividing earnings before interest and taxes (EBIT) by asset’s book value. Market to Book Ratio This ratio helps to find the market value of a company in relation to its book value. It also helps to identify undervalued or overvalued investments by taking its book value and dividing it by market value. DuPont analysis: DuPont analysis is done to identify the root from which profitability come from. ROE is affected by three things, namely, Operating efficiency, Asset efficiency and financial leverage. These segments are calculated by profit margin, total asset turnover and equity multiplier respectively. If your ROE is not impressive then DuPont analysis will help you locate the part of the business that is underperforming. Window dressing" techniques It is a strategy used by portfolio managers or fund managers to improve the appearance of their portfolio before showing it to the clients. It is their duty to show their holdings and results to the client periodically. Two of the most common techniques are described below: i. Firstly, to make the fund look attractive, the portfolio manager sells stock which have caused huge loses and purchases high growth stocks before presenting it to the client. ii. Secondly, portfolio managers may invest in securities that do not meet the style of fund. For example, a hot trading share is bought in a commodity fund to deceive clients about what they are paying for. Works Cited Bloomberg. Bloomberg Business Week. . McClure, Ben. Fundamental Analysis: Qualitative Factors - The Industry. . Ritchie, John C. Fundamental analysis: a back-to-the-basics investment guide to selecting quality stocks. Irwin, 1996. Shim, Jae K. and Joel G. Siegel. Financial Management. Barron's Educational Series, 2008. Read More