Company Resources and Competitive Strength Analysis

Study Notes

Evaluating a Company's Resources, Cost Position, and Competitive Strength

Situation analysis helps assess a company's standing and understand its strategic direction.
Key questions in situation analysis:
- How well is the company's strategy working?
- What are the company's competitively important resources and capabilities?
- Are the company's prices and costs competitive?
- Is the company competitively stronger or weaker than key rivals?
- What strategic issues and problems merit front-burner managerial attention?
Assessing strategy effectiveness:
- Indicators of performance: trends in sales and earnings growth, stock price, financial strength, customer acquisition rates, image and reputation, improvements in internal processes.

Performance Indicators

Financial Ratios help evaluate a company's performance
- Profitability Ratios: measure company's ability to generate profits from its operations
  - Gross profit margin: Measures the percentage of sales revenue remaining after deducting the cost of goods sold
  - Operating profit margin: Measures the percentage of sales revenue remaining after deducting all operating expenses
  - Net profit margin: Measures the percentage of sales revenue remaining after deducting all expenses, including taxes
  - Return on total assets: Measures the profitability of a company's assets
  - Return on stockholders’ equity: Measures the rate of return on the investment made by shareholders
  - Return on invested capital: Measures the profitability of a company's investments
  - Earnings per share: Measures the amount of net income earned per share of common stock outstanding
- Liquidity Ratios: measure a company's ability to meet its short-term financial obligations
  - Current ratio: Measures a company's ability to pay off its current liabilities with its current assets
  - Working capital: Measures a company's ability to make short-term investments and meet its obligations
- Leverage Ratios: measure a company's financial leverage, which refers to the amount of debt used to finance operations
  - Debt-to-assets ratio: Measures the percentage of a company's assets that are financed by debt
  - Long-term debt-to-capital ratio: Measures the percentage of a company's capital structure that is financed by long-term debt
  - Debt-to-equity ratio: Measures the amount of debt a company has for every dollar of equity
  - Long-term debt-to-equity ratio: Measures the amount of long-term debt a company has for every dollar of equity
  - Times-interest-earned (or coverage) ratio: Measures a company's ability to pay its interest expenses
- Activity Ratios: measure a company's efficiency in managing its assets
  - Days of inventory: Measures the average number of days a company holds its inventory
  - Inventory turnover: Measures how many times a company sells and replenishes its inventory
  - Average collection period: Measures the average number of days it takes a company to collect its receivables
Dividend yield on common stock: measures the annual dividend per share as a percentage of the current market price per share.