SWOT Analysis for Stocks for Beginners

SWOT analysis is a procedure to evaluate a company’s current financial health i.e., strength, weaknesses, opportunity and threats. Specifically, SWOT analysis of a company or stock is the assessment of what the company can do and cannot do with its potentials, opportunities and threats. In this column, we will see how to make SWOT analysis of a company or stock and understand strength, weaknesses, opportunity and threats of a company or stock in which you wish to invest your hard earned money.

S = Strength of a company

The strength of a company depends on various factors. In other words, a company may be strong or have strength on different aspects. The company may enjoy a competitive advantage over the other companies due to the price of its product or good quality product or satisfactory customer service. Let’s understand this with an example. Whenever we talk or think about adhesive the first names come to our mind is Fevicol, Fevistick, Fevikwik, m-seal, Dr. Fixit etc. All these are brands of Pidilite industries. The products of Pidilite Industries possess a superior quality. The company maintains a vast distribution network and superior customer service to establish this company as a market leader in the adhesive Sector or Industry.

Whenever we talk or think about Trolly or casual Bags, the first names come to our mind is Aristocrat, Skybags etc. All these are brands of VIP industries. This is the brand name of a company. So, you need to consider these factors before making an investment in a company.

  • Whether the industry or company creates an entry barrier 

After selecting the company you need to analyse the industry or sectors in which the specific company is in operation i.e., the growth potential of the industry or whether the industry or company creates an entry barrier. Let’s make it clear with an example. Suppose, you want to open a restaurant, then you can easily open a restaurant as it does not require the best skill level, large capital and a vast infrastructure. But if you want to set up a company of adhesive industry or automobile industry or pharmaceutical industry, you will face a great entry barrier created by these industries. These industries, however, have created a massive barrier like large capital expenditure, exclusive distribution network, government regulations, patents, brands reorganizations and still counting.

The harder the entry barrier is the better the advantage for the existing companies have. A mediocre company in a growth industry can generate a better return on equity than a good company in a dying industry. You have to watch out which industry is growing and likely to deliver a better return on equity.

W = Weakness

The weakness of a company prevents the company from performing well. If a company has any weakness, it cannot deliver the desired results at the optimum level. Obviously, any company needs to or has to improve any kind of weaknesses to run its business successfully. High debt, inadequate supply chain, unsatisfactory customer service, insufficient service centres, unproductive staff, low-quality products etc. are some weaknesses that a company may have.

O = Opportunities

Opportunity refers to the favourable external or internal factors that an organization or a company can utilize to gain competitive advantage. Suppose, in the GST era, the rate of automobiles has reduced by 8%. So, the companies operating in this sector can make proper utilization of this fund. This reduction in tax burden will lead to a reduction in the price of those products or the companies may make use of this fund for expansion of the business. There may be other such situations which can be treated as opportunities for business gain. This opportunity can shift the business from unorganised player to the organised player. So, the big guns may treat this as a scope to gain a competitive advantage.

T = Threats

Threats are the problems or obstacles that may do any kind of harm generally lead to make a loss of the company or the organization. For example, many business news channels show whether the market will go upward depends on the forecast of monsoon report. A common retail investor cannot understand what the relationship is between a good monsoon and share market.

The main workforce of our country is engaged in agriculture which accounts for more than 50% of employment. Apart from this 15% of the GDP comes from agriculture. The good and normal monsoon in a particular year increases the productivity and the farmers get fair price resulting in higher earnings. It improves their financial condition to some extent. Then, they can use the surplus money for products of their livelihood.

A good monsoon helps to produce sufficient crops. This eases the availability of agricultural products in the market leading to reduce food inflation. When the inflation is low common men, as well as farmers, get the purchasing power for luxurious things.

When productivity is normal, agricultural production decreases the manufacturing cost of packaged foods and other edible products.

Again, with the normal production, the farmers can repay their loans owing to higher earnings. This reduces the NPA as they repay the loans in banks.

In addition to,

They will try to improve their lifestyle with various luxurious things like electronic gadgets, cosmetics, clothes, Motorcycles, bikes, cell phones, televisions and other accessories.

On the other hand, drought creates a completely opposite situation. All the businesses are related to agriculture directly or indirectly. So, drought affects the business of almost all the companies. Our economy is dependent on agriculture and agriculture is dependent on monsoon. So, less monsoon or draught affects the economy.

SWOT Analysis for Stocks for Beginners

Let’s make use of SWOT analysis on the company Maruti Suzuki.
S = Strength of Maruti Suzuki
  • Financial strength

Maruti Suzuki produces a vast variety of four wheeler cars ranging between 3 lakh to 15 lakh. All the cars produced by the company have a lower price in comparison to other cars produced by other companies. Maruti Suzuki offers the same features in a car at the lowest rate of cost.

  • Distribution Network

Maruti Suzuki has a vast distribution network as well as service centres all over the country. Other companies are not still able to set up so many showrooms and service centres. Take any semi town or suburban area, you can easily find a service centre as well as the showroom of Maruti Suzuki.

  • Brand reorganization

Maruti Suzuki maintains a good brand value. At present day Maruti Suzuki is the most recognized brand name in the Indian market. Now everyone understands four wheeler means it is Maruti.

  • Management of the company

Management is the backbone of a company. A quality management raises a company to the pick. It is a proven fact that a good management in competitive industry yields better returns than the worst management in a monopoly market. In order to access the strength of a management, you need to consider the following aspects.

  • The persons who manage the company’s business and the persons in key positions i.e., CEO, CFO, COO & CIO.
  • You need to examine the educational and employment backgrounds and previous employment records of the personnel. Suppose, the CEO previously worked in the coal sector and then he has shifted to technology. There are minimum chances that he will succeed. Ask yourself whether he is able to deliver success to the company.
  • You should analyse the management’s style how the team operates the business, whether they promote the business as an open, transparent and flexible way.
  • You need to analyse when the management has taken charge of the company. Suppose, the management has been unchanged during the past 10 years. Then this long tenure of the management is a good indication. It means the management has been quite successful and has delivered the desired financial results such as compounded sales growth, compounded profit growth, a good return on equity. If you see a company is changing its management team frequently then you need to invest your money to somewhere else.

SWOT Analysis for Stocks for Beginners

Again, if you watch only restructuring of business or management of the company, you need to analyse carefully. The restructuring is not always bad. There are several businesses which have turned around. You need to watch out the new management team’s members, their past achievements. When a company hires management, it chooses wisely who can do well for the company’s current financials.

  • Competitive advantage

A competitive advantage allows a company to produce quality service and better price for its customers. Then this competitive advantage accelerates the company’s sales margin which increases profit margin than its competitors i.e., peer companies. When you invest your money in any company, you should choose such a company that has a sustainable competitive advantage in respect of cost structure, brand reorganization, corporate reorganization, product quality, distribution network and superior customary support.  The brand value or name of any company is in the billions of money. A portfolio of brand influences the sales and growth of the company in many ways. It is a competitive advantage than its peer companies.

Let’s take the example of the four-wheeler company Maruti Suzuki. It is a notable fact that Maruti Suzuki offers four wheeler cars at affordable rates. No other company in the market can sell four wheelers at such an affordable rate. So, the Maruti Suzuki enjoys a competitive advantage over other companies. Again, if you want to buy a four-wheeler, first of all, you check the showrooms and service centres available of the concerned company. In this case, also Maruti Suzuki offers maximum showrooms cum service centres across the country. On the other hand, if you see the other companies like Hyundai, Ford, BMW, Mercedes Benz etc. these companies cannot provide so many showrooms or service centres.

So, from the above discussion it is clear that if you intend to buy a car, you should see whether there is any service centre in your locality. Here Maruti Suzuki gains a competitive advantage. The above-mentioned facilities separate Maruti Suzuki from other companies. A strong brand name, loyal customer base, a strong balance sheet, unique technology, reasonable product rate etc. are the strength of a company.

W = Weakness of the Maruti Suzuki
  • Time and labour intensive production process.
  • Limited capital for expansion.
  • Much inferior interior decoration of the vehicles as compared to the cars produced by some international companies like Hyundai, Volkswagen, Nissan etc.
  • As society is being modernised, people now have access to international brands. People now can choose among various other models available according to their budget.
  • Deteriorating relations between the management and the unions of labourers. The frequent strikes by the labourers have affected the production and in turn sales. The agitations have also affected the goodwill and brand equity of the company.
  • While many other companies are producing SUVs, Maruti Suzuki has not concentrated its business to this segment.
O = Opportunity for Maruti Suzuki
  • Increases the number of stores to access more customers.
  • Continuously produces cars at a low price like Maruti Suzuki Omni, Maruti Suzuki Alto etc.
  • Buys new equipment to lower production cost and time.
  • May go to equity financing to access more capital to expand the business.
  • Maruti Suzuki has launched its LPG version of Wagon R and it was a good move simultaneously.
  • Maruti Suzuki can initiate to launch vehicles that can run on electric. Electric vehicles are cheaper to run and can be a better option of petrol or diesel.
  • Maruti Suzuki has recently launched various SUVs to enter in the other segments. These models are giving tough competition to existing per companies and are expected to succeed.
  • Maruti Suzuki exports cars to American and UK markets. This will boost revenue as well as profit margin in the upcoming future.
  • Indian economy is growing rapidly. This will lead to increase per capita income which will enable people to buy four-wheelers.
T = Threats for Maruti Suzuki
  • Many other big guns are giving more features in a four-wheeler at an affordable rate to gain a satisfactory competitive advantage.
  • Competition is increasing due to peer automobile companies. Many other companies have introduced different segments of the car industry to expand its footsteps.
  • People are now more financially literate. They check and verify many other four wheelers of various companies and then choose the best car with affordable rates according to their need.
  • Owing to the international brands like Volkswagen, Ford etc. major players like Maruti Suzuki, Hyundai, and Tata have lost their market in India year on year.
  • Many Chinese companies are also planning to launch four-wheelers across various car segments like SUVs, light vehicle, luxurious cars. This will give tough competition to existing companies like Maruti Suzuki.

Read also: Fundamental Analysis of Stocks For Beginners

Read also: How to Pick Best Stocks for Consistent Returns

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