Question

There are non-diversifiable risks such as the Beta risk of an asset, project or industry and; diversifiable risks that can be offset by a higher discount rate to offset them. What do you think?. Ratios, indices or financial indicators are classified into several categories and their interpretation and correct reading is essential in the diagnosis of a company or a corporation. This implies that its good calculation and use exonerates the financial analyst from using industry indicators or trying to produce financial indicators that are generally known. What do you think?. Explain why the sustainable growth rate is the highest growth rate the company can maintain without increasing its financial leverage. Some companies like Walmart have decided that they can manage their inventories on a smaller scale than before, such as the so-called "Just in time." How good, fair or bad can this measure be?

Answer 1

Unsystematic risk or diversifiable risk are specific to company. These include business risk and financial risk. Such risk may be caused by labor strikes or some natural disasters. These risks are not dependent on overall market conditions. Such risks can be eliminated by diversifying the portfolio and can be offset by using higher discount rate to reflect unsystematic risk. However, systematic risk that is market risk cannot be eliminated by portfolio diversification. It is measured by beta. Such risks can be eliminated by hedging.

All financial research analysts generally use fundamental analysis or technical analysis use many financial indicators to value a firm or a security. A errorless calculation and its interpretation is essential to diagnose the critical problems of a firm and find out solution to that problem. For example, a low Gross Profit margin is an indicator of a high amount of factory expenses like raw material, labour or power or fuel if sales are increasing. So, the firm can take measures to reduce manufacturing expenses here. So, the correct calculation and interpretation of ratios along with various industry indicators will assist financial analysts to forecast the future value of the firm and predict the present value of firm and its stock.

Sustainable growth rate is the maximum growth rate, a company can achieve through its sales or revenue growth without increasing its equity or debt. So, without being over levered, a firm can achieve SGR. It is the return on equity on the amount of net income that is not paid to shareholders as dividends. The companies try of manage debtors, creditors, inventory and try to maximize sales to achieve SGR. In long run, its difficult to maintain SGR as the economic and competitive scenario might change.

Just in time inventory system helps to maintain inventory at lower levels to meet specific customer requirements. It results in reduction of large inventory holding costs and scrap costs. So less working capital is tied in inventory. the problem comes if the supply of material is delayed. However, now, due to updation of technology, such problems may be avoided. It results in increased efficiency through reduction of storage costs. Walmart uses it perfectly to improve is efficiency.