Forensic Analysis of Financial Statement - SWOT as a tool

In previous two articles (published on CAclubindia), we had discussed:

Article-1 Basics of Financial Analysis

Article-2 Basics of Understanding Business and Industry

In the last article, we learned basic rules for understanding business and Industry, now we move forward to some tools, which are used for the systematic gaining of Business knowledge. Starting with the first tool - SWOT Analysis:

SWOT ANALYSIS OR SWOT MATRIX

We must have studied this in our CA or CMA or MBA or any other professional course curriculum but we never bothered about it and, just read it, write it if asked in the exam, got the marks, and lastly forgotten. This concept is actually applied in real world.

SWOT Matrix is mainly used for Organisational Strategy building and Business planning. From our perspective, it may be useful in financial analysis to understand qualitative aspect.

SWOT

S - Strength: Characteristics of the business that will give you an added advantage over peers i.e. cutting edge. E.g. Company having an innovative product which requires long-time to develop by rivals.

W - Weakness: As opposite to Strength, these are characteristics of the business that place business into the disadvantage as compare to peers. E.g. Company has potential but it lacks efficacy of Capital.

O - Opportunities: Elements or Changes in the environment that the business can exploit for its advantage. E.g. Policy changes, positively affecting the company

T - Threats: As opposite to Opportunities, threats refer to factors that have the potential to negatively impact an organization. E.g. Flood may be considered as Threats for the agro-producing company since it can spoil all their yields.

Internal and External Factors

Internal Factors: Strength and Weaknesses are internal to the organization i.e. at the micro level. It is manageable and under control by/of the Company

External Factors: Opportunities and threats are beyond the control of the organization i.e. at Macro level

The organization needs to overcome its weaknesses and to make a strategy to combat threats if the organization is successful then it will add value to organization otherwise it will fail.

EXAMPLE: SWOT matrix of Textile Industry

Generally, listed entities' provide detailed opportunities and threats, government initiatives and policies, future outlook etc. in their annual report.

(Source: Pg. 38-39 of KSL and Industries AR 2016 downloaded from bseindia.com)

Strengths

• Self-reliant industry producing the entire supply-chain i.e., cotton and fibres.
• Highly competitive spinning sector.
• Large and growing domestic market.
• Second-largest textile producer in the world.
• Abundant Raw Material availability that helps industry to control costs and reduces the lead-time across the
• Low labour cost and availability of skilled and technical labour force.
• Excellence in fabric and garment designing.
• Vast textile production capacity and efficient multi-fiber raw material manufacturing capacity.
• Availability of large varieties of cotton fiber and has a fast-growing synthetic fiber industry;
• Promising export potential.

Weaknesses

• Small size and technologically outdated plants result in lack of economies scale, low productivity and week Quality control.
• Cotton availability is vulnerable to erratic monsoon and low per hectare yield.
• With the exception of spinning, other sectors are fragmented. Sectors such as knitted garments still remaining as an SSI domain
• Labour laws and policies lack reforms.
• Infrastructure bottlenecks for handling large volumes.
• India lacks in trade pact memberships, which leads to restricted access to the other major markets.
• Huge unorganized and decentralized sector.

Opportunities

• End of the quota system and full integration of the textile industry.
• Low per-capita consumption of textile indicating significant potential growth.
• Increased use of CAD to develop designing capabilities and for developing greater options.
• Shift in the domestic market towards readymade garments and domestic textile consumption increasing with growing disposable income.
• Cheaper production and marketing costs and enormous opportunities have tempted Taiwanese Companies to work on Joint Ventures with the Indian Companies especially for the manufacture of man-made fabrics.

Threats

• Survival of the fittest-in term of quality, size delivery and cost. There is an increased global competition in the Post 2005 trade regime under WTO.
• Pricing pressures.
• Stiff competition from other Asian countries.
• Increase in regional trade could reduce the share of market opened for India, China, and other countries.
• High production cost with respect to other Asian competitors.

GENERALISED QUESTIONS USEFUL FOR DEVELOPING SWOT MATRIX

Below mentioned questions are common questions, detailed questions may change Industry to Industry in which company operates.

(Source: mindtools.com, https://www.mindtools.com/pages/article/newtmc_05.htm)

Strengths

• What advantages does your organization have?
• What do you do better than anyone else?
• What unique or lowest-cost resources can you draw upon that others can't?
• What do people in your market see as your strengths?
• What factors mean that you "get the sale"?
• What is your organization's Unique Selling Proposition (USP)?

Weaknesses

• What could you improve?
• What should you avoid?
• What are people in your market likely to see as weaknesses?
• What factors lose you sales?

Opportunities

• What good opportunities can you spot?
• What interesting trends are you aware of?
• Changes in technology and markets on both a broad and narrow scale.
• Changes in government policy related to your field.
• Changes in social patterns, population profiles, lifestyle changes, and so on.
• Local events.

Threats

• What obstacles do you face?
• What are your competitors doing?
• Are quality standards or specifications for your job, products or services changing?
• Is changing technology threatening your position?
• Do you have bad debt or cash-flow problems?
• Could any of your weaknesses seriously threaten your business?

IMPORTANT RESOURCES

It is very important to note that developing SWOT matrix is not an hour or two-hour job but it requires the substantial amount of time to be invested in reading and analyzing. Further, it also depends on Industry to Industry. But I came across various resources which are useful in practicing and developing SWOT Matrix and some of the readily available templates are there. Websites are mentioned below:

• Mindtools (https://www.mindtools.com/)
• Bplans (http://www.bplans.com/)
• Marketing teacher (http://www.marketingteacher.com/)

The author can also be reached at tehsinblog@gmail.com  or http://knowledgekhan.blogspot.in/ 

Note: No part of this article or any article in series is allowed to be copied and share in public (e.g. on any blog or website) without written prior permission of the author in whatsoever manner and, this article strictly meant for Personal use only, not for commercial purpose.