Question

Comment with academic criteria, and supported in bibliographic sources, or in peer-reviewed articles or publications in journals or texts of recognized academic or research prestige the following topics: There are non-diversifiable risks such as the Beta risk of an asset, project or industry and; diversifiable risks that can be offset by a higher discount rate to offset them. What do you think?. Ratios, indices or financial indicators are classified into several categories and their interpretation and correct reading is essential in the diagnosis of a company or a corporation. This implies that its good calculation and use exonerates the financial analyst from using industry indicators or trying to produce financial indicators that are generally known. What do you think?. Explain why the sustainable growth rate is the highest growth rate the company can maintain without increasing its financial leverage. Some companies like Walmart have decided that they can manage their inventories on a smaller scale than before, such as the so-called “Just in time”. How good, fair or bad can this measure be?

Answer 1

Part 1 - Comment with academic criteria, and supported in bibliographic sources, or in peer-reviewed articles or publications in journals or texts of recognized academic or research prestige the following topics: There are non-diversifiable risks such as the Beta risk of an asset, project or industry and; diversifiable risks that can be offset by a higher discount rate to offset them. What do you think?

Risk diversificaton can be used as a way to reduce risk exposure to a portfolio. This is process wherein multiple assets are put together that increase the returns in a way that reduces the overall risk of a portfolio. This brings us to the concept of Diversified risk and Undiversified risk, this happens, only when the securities in the portfolio have different responses to the market.

Diversifiable of Unsystematic risk: Unsystematic risk can be described as the risk which is inherent with a company or industry. This risk is unique or specific to a company / industry and is also called unsystematic, diversifiable or systematic risk. Such risk can be reduced by diversification. Some examples can be regulatory changes, technology obsolesence, change in management, threat of new competitors etc. Sometimes, these risks can be anticipated but it's not certain when they would occur. For eg, an investor for an airline stock may be aware of a new regulation in aviation industry but may not know when that would come into effect and how that news will be percieved by the market.

Why is it called diversifiable risk? because it can be successfully eliminated by diversifying the portfolio.  

Non-diversifiable of Systematic risk: As the name suggest, simply, risk of an investment asset (real estate, bond, stock/share, etc.) which cannot be eliminated by diversification is a non-diversifiable risk. Such risk is common to a whole class of investment assets. They are impacted by macro economic changes and other events which affect large sections of the market. Examples can be inflation, war, political events, changes in investment policy, alterations in taxation clauses, altering of socio-economic parameters, global security threats and measures, etc..

Non-diversifiable risks are identified through the analysis and estimation of the statistical relationships between the different asset portfolios of the company through different techniques, including principal components analysis. There is no specific method that can be used to handle the non-diversifiable risk. Their impact is reflected on the entire market.

Systematic risk can be measured using 'beta'. Beta is a measure of the volatility of a security or portfolio compared to the market as a whole. A beta coefficient can measure the volatility of an individual stock compared to the systematic risk of the entire market. Beta describes the activity of a security's returns as it responds to swings in the market.

Part 2 - Ratios, indices or financial indicators are classified into several categories and their interpretation and correct reading is essential in the diagnosis of a company or a corporation. This implies that its good calculation and use exonerates the financial analyst from using industry indicators or trying to produce financial indicators that are generally known. What do you think?

Ratio analysis is quantitative method that compares line-item data from a company's financial statements to reveal insights regarding profitability, liquidity, operational efficiency, and solvency. Ratio analysis can tell an analyst exactly how a company is performing over time, while comparing a company to another within the same industry or sector. Ratios are a simple tool to use and can provide comparison points for companies. They provide industry evalulation by telling how a stock is performing in its industry against its peers as well as they measure a company today against its historical numbers.

Several categories or ratios can be:

1. Liquidity ratios - measure a company's ability to pay off its short-term debts

2. Solvency Ratios - evaluate the likelihood of a company staying afloat over the long term, by paying off its long-term debt as well as the interest on its debt

3. Profitability Ratios - define the ability of a company to generate profits from its operations

4. Efficiency Ratio - how efficiently a company uses its assets and liabilities to generate sales and maximize profits

5. Coverage Ratios - assess a company's company's ability to make the interest payments and other obligations

6. Market Value Ratios - help to predict earnings and future performance

Use of this aids in measuring efficiency of the company, help in decision-making, aid in intra firm comparison, useful in financial planning. forecasting and work as a future guide.

There are market indicators that are also quantitative in nature and seek to interpret stock or financial index data in an attempt to forecast market moves. They use data points from multiple securities. Market breadth and Market Sentiment are two of the commonly used indicators.

Part 3 - Explain why the sustainable growth rate is the highest growth rate the company can maintain without increasing its financial leverage. Some companies like Walmart have decided that they can manage their inventories on a smaller scale than before, such as the so-called “Just in time”. How good, fair or bad can this measure be?

The sustainable growth rate is the maximum rate of growth that a company can sustain without having to finance growth with additional equity or debt. Companies with high SGRs are usually effective in maximizing their sales efforts, focusing on high-margin products, and managing inventory, accounts payable, and accounts receivable. The SGR of a company can help identify whether it's managing day-to-day operations properly.

Raw materials and inventories are considered as current assets, however, just-in time inventory has changed this notion completely. JIT is considered as waste or dead investment, incurring additional costs.

JIT reduces inventory storage costs significantly by receiving goods only as they are needed in the manufacturing process. JIT avoids the waste associated with overproduction, waiting for material and holding excess inventory. As the name suggests, just-in-time means that a manufacturer makes only what is needed, only when it is needed, and only in the amount that is needed. An example of JIT can be fast-food restaurants, which use just-in-time inventory to serve their customers on a daily basis during meals. Fast food restaurants have cheese, burger patties, bread, hot dogs, sauces and all other fixings in a refrigerator, but they don't start cooking cheeseburgers until a customer places an order.

Walmart has decided to move to JIT, the original concept was pionereed by Toyota.This model lets manufacturers reduce their overhead expenses while always ensuring that parts are available to manufacture their products. This allows a company’s customers to be better served, and lowering the cost of doing business at the same time.

Using this, a manufacturer has a better level of control over its entire manufacturing process, thereby, making it easier to respond quickly when the needs of customers change. For eg, a manufacturer that uses the just-in-time inventory model can quickly increase production of an in-demand product, while reducing production on products that are slowing down.

A retail store like walmart, can renovate its warehouse space, providing additional retail floor space without expanding the store itself.

To make this model a success, the complete workforce must understand the entire JIT process and should immediately shift to where they are needed to meet customer demand swings. This will take a sizable commitment of both time and money to stay the course in implementing JIT. If not, this system will never gain traction within the company.