Page 133 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes 5. What has been the amount of money spent in the research and development activities of
the firm? Did amount on the research and development in the industry relate to its
redundancy or otherwise?
6. What is the assessment of this industry in terms of its sales and profitability in the short,
intermediate and long run?

The impact of all these factors have to be finally translated in terms of two most crucial numbers
i.e. profitability - their level and expected rate of change during short, intermediate and long
run.
4.2.6 Industry Analysis Factors

The securities analyst will take into consideration the following factors into account in assessing
the industry potential in making investments:
1. Post-sales and earnings performance

2. The government's attitude towards industry
3. Labour conditions
4. Competitive conditions
5. Performance of the industry
6. Industry share prices relative to industry earnings

7. Stage of the industry life cycle
8. Industry trade cycle
9. Inventories build-up in the industry
10. Investors' preference over the industry

11. Technological innovations
4.2.7 Techniques of Industry Analysis

So far, we have discussed about various factors that are to be taken into account while conducting
industry analysis. Now, we turn our attention towards various techniques that help us evaluate
the factors mentioned above.
End Use and Regression Analysis: It is the process whereby the analyst or investor attempts to
dial the factor that determines the demand for the output of the industry. This is also known as
end-use demand analysis. In this process, the investor hopes to uncover the factors that explain
the demand. Some of the factors are found to be powerful in explaining the demand for the
product, like disposable income per capital consumption, price elasticity of demand and per
capital income. In order to identify the factors that affect demand, statistical techniques like
regression analysis and correlation have often been used. These help identify the important
factors/variables. However, one should be aware of their limitations.

Input Output Analysis: This analysis helps us understand demand analysis in greater detail.
Input of analysis is a very useful technique that reflects the flow of goods and services through
the economy, including intermediate steps in the production process as the goods proceed from
the raw material stage through to consumption. This information is reflected in the input-
output table that reflects the pattern of consumption at all stages, not at the final stage of
consumption of final goods. This is done to detect any changing patterns. It might also indicate
the growth or decline of industries.

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