Why Analyse an Industry Many industry participants have similar business models. They often compete in the same or similar product markets as sellers and in factor markets as buyers, so they tend to be exposed to the same demand and supply opportunities and risk factors. As will be discussed later with Porter’s Five Forces model,…
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Sources and Uses of Capital Evaluating Capital Investments and Capital Structure Returns on invested capital over the longer run, compared with investors’ required rates of return, can be used to evaluate whether management has used investors’ capital wisely. Risks related to the capital structure can be measured using leverage and coverage ratios, credit ratings by…
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Operating Costs and Their Classification Generally, operating costs are incurred in generating—or are otherwise related to—current period revenue: all costs related to the acquisition, production, sale, improvement, and delivery of goods and services; the management of business activities; and compliance with laws and regulations. Behaviour with Output: Fixed and Variable Costs Using a fixed/variable operating cost…
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Revenue Drivers The analysis involves identifying drivers, which are causative factors that explain the level of and changes in an output variable (here, revenues), and understanding the evolution of the drivers over time. Analysts can take a bottom-up or top-down approach to determining revenue drivers. A bottom-up approach decomposes revenues into drivers such as sales…
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Determining the business model is the first step in our industry and company analysis framework because it summarises important drivers of an issuer’s financial results and position, focuses the analyst on what requires further investigation, and should begin setting the analyst’s expectations for the issuer. Information sources that analysts use to answer these questions include…
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Analysts value and make investment recommendations on issuers’ equity securities using scenarios of future earnings, cash flows, and financial position. These future scenarios are structured in the form of financial statements and are known as financial statement models. While a financial statement model is quantitative, it is not a mathematics problem to solve with a…
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Companies issue equity securities on primary markets to raise capital and increase liquidity. This additional liquidity also provides the corporation an additional “currency” (its equity), which it can use to make acquisitions and provide stock option-based incentives to employees. The primary goal of raising capital is to finance the company’s revenue-generating activities in order to…
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Return Characteristics of Equity Securities There are two main sources of equity securities’ total return: price change (or capital gain) and dividend income. The price change represents the difference between the purchase price (Pt–1) and the sale price (Pt) of a share at the end of time t – 1 and t, respectively. For investors who purchase depository…
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Direct Investing Investors can use a variety of methods to invest in the equity of companies outside of their local market. Depository Receipts A depository receipt (DP) is a security that trades likeanordinary share on a local exchange and represents an economic interestin a foreign company. It allows the publicly listed shares of a foreign…
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Private equity securities are issued primarily to instituational investor via non-public offerings, such asprivate placements. There are three primary types of private equity investments: venture capital, leveraged buyouts, and private investment in public equity (or PIPE). Venture capital investments provide “seed” or start-up capital,early-stage financing, or mezzanine financing to companies that are in the early…
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