Uses Of Industry Analysis


Company analysis and industry analysis are closely interrelated. Company and industry analysis together can provide insight into sources of industry revenue growth and competitors' market shares and thus the future of an individual company's top-line growth and bottom-lin profitability.

Industry analysis is useful for:

·    Understanding a company's business and business environment
·    Identifying active equity investment opportunities.
·    Formulating an industry or sector rotation strategy.
·    Portfolio performance attribution.
There are three main approaches to classifying companies:

1. Products and/or service supplied.

This is the main approach to industry classification. Companies are categorized based on the products and/or services they offer. The term sector is used to refer to a group of related industries.

2. Business-cycle sensitivities.

A cyclical industry is sensitive to business cycles. Its revenues are generally higher in periods of economic prosperity and lower in periods of economic downturn. The performance of a non-cyclical industry is independent of the business cycle.

Non-cyclical industries can be further sorted into two categories:

-    A defensive (or stable ) industry demonstrates stable performance during both economic expansion and contraction.

-    Companies in a growth industry achieve above-normal growth rate and profitability at any stage of the general business


However, there are limitations when using these industry descriptors. For example, some industries may include both growth companies and defensive companies.

Note two things:

-    Business-cycle sensitivity is a continuous spectrum.

-    A global company can experience economic expansion in one part of the world while experiencing recession in another part.

3.    Statistical similarities

Statistical cluster analysis is defined as the art of finding groups in data such that the degree of natural association is high among members within the same class (internal cohesion) and low between members of different categories (external isolation. This technique can be used to categorize companies into different industries.

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