Wednesday, October 8, 2008

Competitive Profiling with Financial Ratio

Competitive Profiling with Financial Ratio - Competitive Intelligence Magazine

This is the main points of paper was published by The Competitive Intelligence Magazine It will help you to use the financial analysis for competitive profiling


Companies with great cash flow, low debt, high revenue per employee, and good financial ratios across the board will be the ones who have the financial stability to expand, acquire and generally mount a credible competitive threat.

Companies with poor cash flow, high debt, low net working capital, and low revenue per employee will generally have difficulty staying in business - let alone gaining market share.

This kind of analysis indicates which companies can and can not adequately fund ambitious construction programs, huge advertising campaign, and accept short term losses while they gobble up market share. If you see a big announcement of a rival, you can use this analysis to estimate whether their new strategy will be successful

Low liquidity requires cash flow, high debt load and / or short term debt will limit additional funding, and make a company sensitive to interest rates fluctuations

A company with strong cash flow relative to its peers will have correspondingly strong options available , they can more easily fund promotional efforts, fund merger or territorial expansion, if the firm is overly cautious, they may find the strong cash flow attacks the takeover bid

The debt ratio measures how much the company relies on short term debt to solve its business problems, a company with a high total debt/lT debt ratio will have a relatively high percentage of short term debt in its financing, and will be much more sensitive to interest rate fluctuations

Competitors with very low levels of short term debt, or total debt for that matter, will have a wider access to funding if they wish to pursue a market expansion
If cash flow is negative this ratio is a measure of the rate of blood loss

Goodwill and intangibles can be a playground to hide many a management sin
If subtracting intangibles make TNW negative, it is an important signal for the health of the business. Negative TNW is a bad sign unless there are some very good reasons for it

The ratio of current liabilities to TNW indicates whether your business is creditor funded or investor funded, A creditor funding is strained by economic conditions

Net Working Capital (NWC) measures whether current operations are self supporting
If cash and receivables are less than expenses and payables, then the enterprise is not sustaining it self, consistent operating losses drain current assets. This is bad sign for the health of the company

The ratio of funded debt/NWC examines how rapidly a company can pay off its debt out of current operations. If the denominator of this ratio is small, the debt service will be difficult, especially if the interest rates are rising

Some companies adding to cash reserves via retained earning, and by selling additional stock, when stock prices are depressed, little is gained by selling additional stock, this will depress the stock price even future and will not raise much cash, retaining earnings will cut dividends, and is likely to depress the stock price

Strong NWC will fuel strong cash flow and provide tidy operating margins, you can expect a company with a good NWC to be more successfully aggressive because they have more room to move

The equity to debt ratio (stock/total debt) measure the amount that assets can decline, or debt can increase before the company becomes insolvent: a much more serious bankruptcy conditions

Price wars are won by the firm with more capital intensive cost structure
when demand falls however, the labor intensive firms is better able to cut costs, it is hard to lay off a new building or to downsize a sheet-metal press

A more direct way of measuring capital intensity is to see how revenue changes compared to the capital stock
The capital intensive company is more to likely to price aggressively. The more labor- intensive firms is more likely to increase its capital stock during an expansion

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