Page 167 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes The relevant questions to be probed further by the analyst in this respect could include the
following:

What is the nature and type of technology used in the industry?
Are there any expected changes in the technology in terms of offering new products in the
market to increase in sales?
What has been the relationship of capital expenditure and the sales over time?
Whether more capital expenditure has led to increase in sales or not

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?

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.
8.4.4 Industry Analysis Factors

The securities analyst will take into consideration the following factors into account in assessing
the industry potential in making investments:

Post-sales and earnings performance
The government’s attitude towards industry
Labour conditions
Competitive conditions

Performance of the industry
Industry share prices relative to industry earnings
Stage of the industry life cycle
Industry trade cycle

Inventories build-up in the industry
Investors’ preference over the industry
Technological innovations

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.

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