The company has likely tried to adjust the size of the exceptional profit by being very strict in the way it accounts for operating income and expenses. Conversely, tobacco, one of the most mature markets in existence, generates very high returns on invested capital for the last few remaining companies operating in the sector. Granted, we will always have to eat and drink, but not necessarily in the same way.
The position held by a company in its market is reflected by its market share, which indicates the share of market business (in volume or value terms) achieved by the company. For example, market share is meaningless in the construction and public works market (and never really counts). A value chain includes all companies involved in the production process, from raw materials to the final product.
Unlike film production companies, they did not have access to alternative sources of revenue (royalties from pay TV or videocassettes/DVDs), which reduced the number of tickets sold. This step allows the analyst to measure the flexibility of the income statement in the event of a recession or strong growth in the market. Process-oriented manufacturing is a type of industrial organization that took shape in the late 1970s and revolutionized production methods.
Conversely, once the production process has stabilized, it is in the company's best interest to invest in acquiring a tighter.
D ISTRIBUTION SYSTEMS
Roughly speaking, companies in the past were mainly focused on production and had a vertical organizational structure because value was concentrated in the production function. Today, in many industries (telecommunications equipment, computer manufacturing, etc.), the value lies primarily in the research, innovation, and marketing functions. This outsourcing trend has given rise to companies such as Solectron, Flextronics and Celestica, whose sole expertise is industrial production and who are able to secure low costs and prices by taking advantage of economies of scale as they produce items on behalf of several competing groups.
This approach makes more sense when the main factor motivating customers' purchase is not price, but the product's image, after-sales service and quality, which should be tightly controlled by the company itself rather than by an external player. The investments required are minimal, but the company is less aware of its customers' preferences and the risks associated with cyclical ups and downs are increased. If end customers slow down their purchases, it may take some time before the end retailer realizes the trend and reduces their purchases from wholesalers.
The wholesaler, on the other hand, will suffer from an inertia effect before tapering off its purchases from the manufacturer, who will therefore only be made aware of the slowdown several weeks or even months after it started. And when conditions pick up again, it is not unusual for distributors to run out of stock, even if the manufacturer still has large inventories. Where price competition prevails, it is better for the manufacturer to focus its investment on production facilities to lower its costs, rather than spreading it thinly over a distribution network that requires other expertise from the production side.
T HE COMPANY AND ITS PEOPLE
That said, if the company is having problems, they can act very passively and show a lack of determination which will not help managers much. Finally, analysts must watch out for conflicts between shareholders that can paralyze the normal life of the company. We advise readers to be very careful where incentive systems have been extended to include the majority of a company's employees.
Second, if a company's position begins to deteriorate, its top talent will be quick enough to leave after exercising their stock options before they become worthless. It is an ideal system when everything goes well, but very dangerous in case of crisis, because it worsens the company's difficulties. We cannot overemphasize the importance of analyzing the auditors' report and considering the approved accounting principles before starting a financial analysis of a group's accounts based on the guidance we will present in section 8.4.
If a company's accounting principles are consistent with practice, readers will be able to study the accounts with a fairly high degree of certainty about their relevance, that is, their ability to provide a decent reflection of the company's financial reality. Conversely, if readers discover irregularities or accounting practices that deviate from the norm, there is little need to examine the financial statements because they present a distorted picture of the company's financial reality. To facilitate this task, the appendix to this chapter contains tables showing the main creative accounting techniques used to distort earnings, the shape of the income statement, or the balance sheet.
We suggest that readers remember the following sentence, which can be used as a basis for all types of financial analysis: But the company must make capital expenditures to start the activity: buy equipment, buildings, patents, subsidiaries, etc. which are fixed assets) and set aside amounts to cover working capital. Once these three factors (margins, capital employed and financing) have been examined, the company's profitability, i.e.
This marks the end of the analyst's job and provides answers to the original questions: is the company able to meet the obligations it has made to its creditors. The best way to do this is to look at the cash flow statement for a dynamic analysis and the balance sheet for a snapshot of the situation at the end of the year (see Chapter 12). In the following chapters we use the case of the Indesit group as an example of how to conduct a financial analysis.
T REND ANALYSIS OR THE STUDY OF THE SAME COMPANY OVER SEVERAL PERIODS
C OMPARATIVE ANALYSIS OR COMPARING SIMILAR COMPANIES
This approach analyzes a company based on competing companies, so the information collected from different companies in the sector must be consistent and the sample representative enough to be of any value.
N ORMATIVE ANALYSIS AND FINANCIAL RULES OF THUMB
There can be cases of mass delusion, which leads to all stocks in a particular sector being temporarily overvalued. Rating agencies assess the company's strategic risks by analyzing its market position within the sector (market share, industrial efficiency, size, management quality, etc.) and by conducting a financial analysis. The main aspects taken into account include trends in the operating margin, trends and sustainability of the return on invested capital, analysis of the capital structure (and in particular coverage of financial costs of operating profit and coverage of net debt with cash generated by operations or cash flows).
Let us now deal with what can be described as "automated" financial analysis techniques, to which we will not return again.
T HE PRINCIPLES OF CREDIT SCORING
If Zis less than 1.1, the probability of corporate failure is high and if Zis greater than 2.6, the probability of corporate failure is low, the gray area is the value between 1.1 and 2.6.
B ENEFITS AND DRAWBACKS OF SCORING TECHNIQUES
Third, the expert system produces a financial report that may contain an assessment of the company and recommendations on specific actions to be taken. Reduction of profit in the year of transfer and subsequent years due to depreciation of the fixed asset produced. Reduction of profit in the year of transfer and subsequent years due to depreciation of the fixed asset produced.
Depending on the option chosen, the amount of depreciation and amortization allowances may change, leading to a change in the depreciation and amortization profile over time. The justification and amount of the relevant expenses must be disclosed in the notes to the accounts. Change in accounting method: disclosures should be disclosed in the notes to the accounts Inventories Incorporation of costs. related to below-normal activity in the evaluation of items held in inventory.
Payment of accrued interest and decrease in profits in the year in which the option is exercised. Change in year-end date • The company hopes to potentially increase its profits during the additional months. It then includes a detailed analysis of the company's accounting principles to ensure that they reflect and do not distort the economic reality of the company.
Only then can the analyst come to a conclusion about the company's solvency and its ability to create value. Scoring techniques are supported by a statistical analysis of companies' accounts, which are compared with accounts of companies that have experienced problems, including in some cases bankruptcies. 5/When launching a new product, should the company invest in the production process or in the product itself?
/Why vertical integration will be rejected as of little value after value chain analysis. EXERCISES 1/Perform an analysis of the frozen chicken value chain and decide which participants in the value chain are in a structurally weak position. Would you be of the same opinion if you had previously done an analysis of the company's value chain and simulated the impact of the crisis on the increase in labor costs due to the introduction of a shorter working week without reducing wages, a 40% increase in the cost of raw materials due to the fall in the value of the euro against the dollar and the rise in oil prices in 2004 ), with 17%.
2/Understanding the “economy” of the company (market, competitive position, production and distribution system, personnel) and the accounting principles used. The slaughterhouse: control over the entire chain upstream, through supply contracts and the sale of the end product.