Financial Statement Analysis for High-Tech Industries

The financial statements analysis (FSA)process converts the financial statements into interactive statistical ratios that can easily be interpreted and understood by interested parties. It is really a way of simplifying the complex financial statements and presenting them in a way that is easy to understand, by revealing the relationship between variables and dependable e.g. revenue for the current period compared to the previous period, or to the current costs of generating sales. FSA attempts to answer questions such as: what is the company’s revenue growth? What are the real profits generated? What is the company’s ability to fend off competitors, what is its ability to repay its debts inter alia.

The company’s financial performance forms FSA’s pedestal and targets a period from which to provide information to help the management and other users of financial statements to make informed decisions on the company’s operation, efficiency and profit echelons. FSA also serves as a forecasting and a diagonistic tool to evaluate and possibly direct the management in identifying problematic areas and provide corrective actions and close monitoring of related activities.

FSA is critical to any organization’s management as it provides much needed details and raises flags when the organization hits or falls shy of the benchmarks. FSA provides the management with the tools to determine changes required to turn the organization around, or if anything needs to be done at all. Although it’s generally assumed that the Generation X (the generation born after the baby boom ended) are more savvy in reviewing financial statements than those born after them (after 1981), it is the later generation who are deemed to be more dependent on computer models to project performances. This may explain probably explain why most corporate fraud has in the last thirty years taken a hike, and the need for more indepth financial statement analysis anot to mention close monitoring by the Securities and Exchange Commission, Public Company Accounting Oversight Board, (PCAOB) and other regulatory bodies formed by the government, to protect the innocent investor. At the end of the day though, it’s the investor (user) who will be required to spend time studying the FSA inorder to  understand the company’s (he/she is interested in) story.

The users of financial statements are equally varied and go beyond the company’s internal users (management and shareholders e.t.c.) to others outside of the company’s peripheral e.g.Securities and Exchange Commission (SEC) for publicly quoted companies, banks and investors,  vendors,  customers, etc . These parties are interested in ‘hearing’ the financial story of the organization, how successful, or the challenges they have or are going to face, before they can invest in them.

While it may be (for the most part) effortless to analyze financial statements for companies operating in normal goods, it gets more complicated and trickier when analyzing High-tech industries. The market and product’s uncertainty, and short product life cycles define these High–tech Companies. High-tech consumers often do not fully know what their future needs will be, and depend mostly on the High-tech companies to develop and introduce new products. High-tech markets are dynamic, unpredictable, short term, and especially if the technology is new.

These traits hinder the financial analysts from exploiting the financial analysis tools in analyzing and predicting their performance. Although ratios are the ultimate results from the analysis process, they do sometimes generate meaningless data, which does not help the reader understand where the company is coming from or going.

Defining the High-Tech Industry

The high-tech industry is intensely competitive and their products typically compete against each other on quality, power consumption, reliability, speed, size, cost, selling price, adherence to industry standards, software and hardware compatibility and stability, brand recognition, timely product introductions and availability. Technological advancement and ongoing research and development ensure timely introduction of newer and superior products in the market. Regular price reductions, short product life cycles and increased product capabilities that result in significant performance improvements comprise the major characteristics of this industry.

According to a study on Microchip manufacturers[1], Porters Five Forces application – which develops an affiliation between bargaining power of buyers, and suppliers, threat of new entrant to the market/industry, substitute products, and rivalry among existing firms – heavily influences the high-tech industry.

Over the years, a few manufactures have taken over the semiconductor market and as such control the industry. As a result, new entrants find they are unable to penetrate the tight market as suppliers exorbitantly charge them for services and products, while hindered by high capital requirements on the other hand. For example, since the market is oligopolistic, buyers have the choice to purchase products from any firm.  The industry on the other hand relies on a monopolistic market for it’s raw materials such as Taiwan Semiconductor Manufacturing Company and United Microelectronics Corp for their supplies while some raw materials used in manufacturing microprocessor products are available only from a limited number of suppliers.

Companies in this industry are constantly in competition to outdo and outmaneuver each other with better and more superior products. For example, although Intel Corporation (NASDAQ: INTC) has dominated the market for microprocessors for many years, its aggressive business practice has limited competitor’s ability to compete against it effectively. Most competitors are unable to penetrate the market and trade profitably.

[1] Mwangi et al, Microchip Industry Analysis, 2007 Research

Source by Julius Mwangi


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