Equity Investments II

Reading 40. Introduction to Industry and Company Analysis

Learning Outcome Statements

k. describe the elements that should be covered in a thorough company analysis.

CFA Curriculum, 2020, Volume 5

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Subject 6. Company Analysis

After an analyst has gained an understanding of a company's external environment, he/she can start company analysis. This includes analysis of the company's financial position, products and/or services, and its competitive strategy. The analyst should try to determine if the strategy is primarily defensive or offensive and how the company intends to implement the strategy.

A firm can pursue one of the two basic types of competitive strategies: low cost or differentiation. To achieve abnormal profitability, a company should either incur low costs in its production process, or receive premium-to-average market price based on its products' differences preferential to customers. High profits will be possible only if the company with a cost advantage can sell its products at high-enough prices and if the company with a differentiation advantage can keep the costs of superior products sufficiently low.

A checklist for company analysis includes a through investigation of:

  • Corporate profile;
  • Industry characteristics;
  • Demand for products/services;
  • Supply of products/services;
  • Pricing; and
  • Financial ratio.

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*thorough investigation