Factors of The Industry For Fundamental Analysis
It is true that knowing a company’s financial statements can provide better insights to investors looking for ideal investment options however, industry plays a major role in building a company’s financial status and stability. Hence, an investor should also look at how an industry works as companies vary in all aspects such as market share, customer base and more. This way investors can gain a sufficient understanding of the company’s financial health.
To know about the volume of business of a company, its market share becomes important to examine. For instance, if a company holds 80% of the market share, it can be fairly interpreted that it is the largest one in the market. This may also imply that it has an edge over its competitors. Market shares become crucial in the fundamental analysis due to economies of scale. It can be expected by a company who has large share than its competitors that it is capable of assimilating high fixed costs of a capital intensive industry.
To know about a company’s growth, investors can evaluate the number of customers in the overall market and whether it will grow. Without any new customers, companies may rely on poaching the market share. Hence, studying industry growth becomes an important factor. Moreover, there can be zero or negative growth rate in some of the markets which again demand to be researched well. For the products that are no more in use by customers due to technological innovations and advancements, the market can have negative growth rate.
Investors may go through the number of competitors of a company to understand the overall competitive landscape. Since industries may have little barrier to entry and a large number of competitors may create a difficult unfavorable for firms. Pricing power is the main concern and risk in the highly competitive industry. Pricing power provides suppliers the privilege to set or increase their prices and thereby passing the costs to customers. Therefore, investors must be aware of the competitive markets.
There can be heavy regulations imposed on certain industries due to several reasons such as importance, the extremity of products etc. However, regulations can be important to the public in some cases, but these regulations can affect the investment decisions of investors for particular companies. In some industries, there are few companies that represent the whole industry and in this case, government tend to exercise their control and specify how much profits companies are supposed to make. Hence, even with the capacity if making huge profits, companies are bound with the regulations to make limited profits.
It is often that regulations can affect businesses, sometimes miserably. hence, investors must always be on a careful check for regulations imposed on companies in order to evaluate the risks and returns for investment purposes.
Investors are required to look at the customer base of companies as a small number of customers relative to huge sales can reflect a negative aspect of the business since a loss of each customer has the tendency to affect revenue enormously.