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
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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