EIC Analysis is nothing but Economic Industry Company analysis is In security selection process, a traditional approach EIC analysis is the abbreviation of economic, industry and company. The person conducting EIC analysis examines the conditions in the entire economy and then ascertains the most attractive industries in the light of the economic conditions. At last the most attractive companies within the attractive industries are pointed out by the analyst.
EIC analysis of a company based on these three different analysis are required to evaluating.
- Economic Analysis
- Industry Analysis
- Company Analysis
1. Economic Analysis
The main objective of an economic analysis is to find out whether or not the economic entity is allocating its resources in the most cost effective manner or not. You can refer to the following given sample of an economic analysis of a company for more information on the same.
- Economic analysis involves comparing at least two alternatives in achieving, for example, a certain goal under specific constraints and assumptions.
- Economic analyses factor in the opportunity costs that people or companies employ. They measure, in monetary terms, what the benefits of a project are to the economy or community.
- Opportunity cost is all about evaluating the option you gave up when you made a choice.
- Study of economic systems or a study of a production process or an industry to see if it is operating effectively and how much profit it is making.
- Economic analysis is all about analyzing the economic aspects of something. Apart from economists, statisticians and mathematicians may also carry out economic analysis.
2. Industry Analysis
In 1980, Michael Porter proposed a standard approach to industry analysis which is referred to as competitive analysis frame work. Threats of new entrants evaluate the expected reaction of current competitors to new competitors and obstacles to entry into the industry. In certain industries it is quite difficult for new company to compete successfully.
The bargaining power of suppliers has also substantial influence over the profitability of the company. The supplies for manufacturing products are required by the company and it does not have sufficient control over the costs. It is not possible for the company to increase the price of its finished products in order to cover the increased costs due to the presence of powerful buyer groups in market of substitute products. So while conducing industry analysis, the presence of powerful suppliers should be considered as negative for the company.
The above considerations of industry structure should be analyzed by the investor in order to make an estimate about the future trends of the industry in the light of the economic conditions. When potential industry is identified then comes the final step of EIC analysis which is narrower relating to companies only.
3. Company Analysis
In company analysis different companies are considered and evaluated from the selected industry so that most attractive company can be identified. Company analysis is also referred to as security analysis in which stock picking activity is done. Different analysts have different approaches of conducting company analysis like
- Value Approach to Investing
- Growth Approach to Investing
Additionally in company analysis, the financial ratios of the companies are analyzed in order to ascertain the category of stock as value stock or growth stock. These ratios include price to book ratio and price-earnings ratio. Other ratios like return on equity etc. can also be analyzed to ascertain the potential company for making investment.