Industry Analysis and Credit Risk

Flashcards covering industry risk factors, PESTEL analysis, Porter's Five Forces, and industry maturity and characteristics as detailed in the lecture transcript.

Business Risk Factors

Factors that directly impact the earnings before interest and taxes ($EBIT$) of a company.

Financial Risk

The risk that occurs when debt levels or repayment schedules are not matching with the company's cash flow.

Structure Risk

Also referred to as group risk, focusing on the organizational structure of the entity.

MIOL

An acronym for the four main levels of business risk: Macro Level Risk, Industry Level Risk, Obligor Level Risk, and Management Level Risk.

PESTEL

A framework for macro risk analysis consisting of Political, Economical, Social, Technological, Environmental, and Legal factors.

Political Risk

Factors including political stability, government intervention, nationalization vs privatization, and political corruption.

Economical Risk

Factors such as credit ratings (S&P, Moody's, Fitch), $GDP$, growth rate, and monetary policies like interest rates and $FX$ rates.

Social Risk

Macro factors including demographics, labor unions, culture, beliefs, location, and social responsibility.

Technological Risk

Risk factors such as product obsolescence, manufacturing technology, and changes in consumer's expectations.

Environmental Risk

Risks related to failure to adapt to climate change, pollution, natural disasters, and natural resources mismanagement.

Legal Risk

Risks stemming from a weak legality system or sudden, repetitive, and illogical regulations.

Monopoly Style

An industry rivalry style with a total monopoly, such as Egypt Aluminum or Eastern Tobacco.

Oligopoly Style

An industry rivalry style characterized by a limited number of companies, such as the telecommunications sector.

Barriers To Entry

Factors determining the ease of entering an industry; the threat is high when economies of scale are low and technology is cheap.

Bargaining Power of Suppliers

The power suppliers have over buyers, which increases when switching costs are high or when the supplier brand is very powerful.

Substitutes

Products from other industries that become threats when new technology makes other options available or price competition forces customers to consider alternatives.

High operating Leverage

A cost structure characteristic where $Fixed Cost > Varibal Cost$, resulting in high risk.

Low operating Leverag

A cost structure characteristic where $Fixed Cost < Varibal Cost$, resulting in lower risk.

Embryonic Stage

The startup phase of an industry characterized by high prices, large investment requirements, and a high risk of failure.

Mature Industry

A phase where future growth is limited, and firms must grow by taking sales from competitors or by diversifying.

Declining Industry

An industry where growth is negative and sales have experienced a consistent decline due to changes in consumer preference.

Non-Cyclical Industry

An industry considered low risk because its products are absolute necessities, such as food, and are not tied to the economy.

Cyclical Industry

An industry that shows a booming trend when the overall economy is strong and a downturn during an economic recession.

Counter cyclical industry

An industry that performs better during recessions than during booming times, such as used cars or shoe repair.

Dependence Risk

The risk associated with concentration, categorized as high risk if a firm is highly dependent on one or two other industries or customers representing $20$ to $30\%$ of sales.

Key Success Factor (KSF)

The minimum factors required for a company to survive in the market.

Competitive Edge

A specific advantage a company has that others do not possess.

SWOT Analysis

A strategic tool used to evaluate internal factors (Strengths and Weaknesses) and external factors (Opportunities and Threats).