Why do credit analysts begin with an analysis of the industry in assessing the business risk of a corporate issuer?

Question

What will be an ideal response?

Answer 1

An analysis of the industry (and its trends) is important for credit analysts because it is only within the context of an industry that company analysis is valid. All proper analysts have to take into consider both some standard and how that standard changes over time or might be influenced by global competition. For example, suppose that the growth rate for a company over the past three years was 20% per year. In isolation, that may appear to be an attractive growth rate. However, suppose that over the same time period, the industry in which the company operates has been growing at 45% over the same period. While there could be many factors to explain the discrepancy in the relative performance, one might conclude that the company is competitively weak. As an example of the need to look at an industry within a global contexts consider the automobile industry. For this industry, it is not sufficient for a company to examine its competitive position in its industry but also investigate its competitive position from a global perspective.