Question

“In general, an industry’s prospects within the global business environment will determine how well or poorly an individual firm will fare, so industry analysis should precede company analysis. Few companies perform well in a poor industry, so even the best company in a poor industry is a bad prospect for investment.”

Elucidate:

1. Industry analysis
2. The business cycle and industry sectors        

Answer 1

i) Industry analysis means measuring that whether an industry is good or bad. This is done my macro analysis of the economy which measures the expansion or recession nature of the industry. In a good industry even a bad company performes well due to the macro factors. Further in case oh bad industry even a good company performs badly due to the mean reversion where a specific company in a industry tends to follow the return of the industry.

ii) Business cycle and industry are positively related. If business cycle is in boom the industry sectors performs better. Most of the sector are directly related to the economic cycle. In case of recession every sector slumps and even the good company fails to perform better in these scenario.