Business Analysis/ OBU Topic 8: Competitor for ratio analysis

If you only consider products and markets your evaluation and analysis will be fairly weak! In the Limitations section you need to point out that the basic company size statistics may affect the validity of drawing direct comparisons between profits, sales etc as one would expect the larger company to benefit from economies of scale and have other competitive advantages etc. (You may need to restate this limitation in your analysis section if it is appropriate to your findings)

Look at products and markets as these may affect the companies’ strategies but when it comes to the financial analysis instead of comparing sales and profits in absolute terms this is a case where the GP / net profit / operating profit ratios may be more relevant to form any valid comparisons. The year on year increases in these in percentage terms could also be revealing – are these ratios virtually static in one company whereas in the other are they climbing/declining and if so, how sharply? And why is this the case? (research the actual reasons, don’t just guess). What about the trends over the 3 years in efficiency ratios, liquidity ratios and investor ratios? (there is probably a significant difference in gearing and capital structures of the 2 companies for example) – and how do all of these findings fit in with the CEO/ Directors’ strategies as stated in the annual reports?

Just don’t attempt a ‘text book’ type approach as it will not lend itself easily to a sensible analysis given the facts you have stated – you need to think ‘outside the box’ a bit. In many respects you have the scope to do a very good analysis if you look at it from various aspects and remember to link the PESTLE and SWOT factors to the financial performance for the main company e.g. how has it built on its strengths and seized opportunities etc.? and reference some good external sources to support your findings.

Finally don’t fall into the trap of just calculating ratios on their own just for the sake of calculating them – this is not what analysis is about – you need to use the ratios as ‘tools’ to help explain the performance always supporting your statements with references e.g. Company A’s increase of x% in its operating profit ratio in 2013 was helped by the fact that it secured a major government contract for road building (National Newspaper, 2013) or Company B’s poor performance – a y% decrease in its production and subsequent market share in 2013, was mainly due to the cancellation of a major airport expansion project by its main customer, Massive Construction plc (Business Journal, 2012). Get the idea? 🙂

@trephena hey there, Am undertaking Topic 8 and i would like some clarification. Am analysing an investment company and it seems quite difficult to come up wt a competitor although i have totally and comfortably been able to analyse the company in mind. After wide consultations esp with @bassaniobroke am told i need a competitor.My tutor says otherwise

Please i need advise from this forum in regards to this so that i may decide on what to do.

Regards.

@Joey first I suggest you should read p30-31 of the Info Pack 2013/14 as that explains WHY you need to be able to make comparisons.

Now let’s look at an actual real life example where a company could be doing well in terms of profit but has done badly compared with its competitors, a company that was a market leader in 2008 and still makes good profits – Nokia. In fact their profits over the years have increased as mobile phone usage has become widespread – so if you were initially just confining yourself to analysing their performance (and totally ignored what has gone on with competitors) you would probably think they were doing well. BUT are they? We now know that Nokia is a good example of a company that took its eye off the ball – and is seriously struggling (and in fact it was announced yesterday that its mobile business has been bought out by Microsoft). If you compared Nokia’s performance over the last 10 years with its rivals (Samsung, Apple) you would see instantly that the ‘good profits’ from the initial analysis in fact are very poor profits in reality – for the last few years they have fallen dramatically and in a frighteningly short space of time IN COMPARISON with their rivals (from market leader to pulling out of the market altogether in fact!!!!). So you see only by putting your company in an industry context can you do a proper analysis and valid evaluation and draw sensible conclusions!

So to pass evaluation you probably now appreciate how important it is to be able to put your company in an industry context. Regarding the company you have chosen – unless you can do a full analysis of its performance which in essence requires some form of bench-marking to be meaningful, then you are probably on a hiding to nowhere. As @bassaniobroke says – why have a wobbly ride on one wheel when 2 wheels are available?

Sorry if this is not what you wanted to hear but my role is to tell students how it is…..