FIN550-Week 5-Discussion 1 Determine whether a steel company or a retail food chain would have a gre

"Business Risk and Analysis" Please respond to the following:

· Determine whether a steel company or a retail food chain would have a greater business risk. Provide support for your rationale.

As defined by Reilly and Brown (2012), business risk “is the uncertainty of operating income caused by the firm’s industry”. Determining the standard deviation of an industry’s operating income or sales is a common method to measure business risk or variability. Dividing the standard deviation value by the mean provides the final ratio. The steel industry it tied to other cyclic industries with high variability; consider the automotive industry, for example. In the steel industry, management has very little control of the operating income or sales because they are dependent upon the cyclic demands of the demanding industries (Peavler, n.d.). In short, the steel industry is highly variable. On the other hand, the food industry normally experiences a fairly consistent demand; sales and operating income are fairly steady. For this reason, the retail food industry should have a lower operating income and sales variability. Consider this analogy: people may wait years to buy that new car, but will always need to eat. This illustrates why the steel industry will always have a higher level of business risk when compared to the retail food industry.

Select one of the limitations of ratio analysis and indicate why you believe it is a major concern when predicting future financial performance.

I believe the most impactful limitation in today’s world still involves the difference between foreign and domestic generally accepted accounting procedures. Sarbanes Oxley has significantly improved this within the U.S., but what about the accounting methods of foreign entities? Is it fair to compare the elements of financial statements that involve variations in the accounting methods? I would have to imagine that the companies of emerging nations, for example, the heavily controlled industries of the Chinese government, are not comparable relative to the accounting methods that place values upon their financial statements. These companies can sway a particular industry average to the point in which predicting future financial performance becomes extremely difficult.

Peavler, R. (n.d.). What is Leverage?: The Meaning of Operating, Financial, and Combined Leverage. [Web Log Post] Retrieved from http://bizfinance.about.com/od/pricingyourproduct/qt/what-is-leverage-and-business-financial-risk.htm

Reilly, F., & Brown, K. (2012). Investment Analysis & Portfolio Management (10th ed.). Mason, OH: South-Western Cengage Learning.

· Determine whether a steel company or a retail food chain would have a greater business risk. Provide support for your rationale.

Steel company would have a greater business risk than a retail food chain, because steel industry is sensitive to the business cycle. The financial crisis has a direct impact on production, consumption, and development of the steel industry because steel is widely used in construction, transport, energy, and domestic appliance manufacturing. In the study of “Economic and qualitative determinants of the world steel production,” the qualitative factors show that steel is not as costly as aluminum, and an environmentally friendly material that will reduce the carbon emissions and promote the sustainable development. Because steel production plays an important part in mechanical machinery, automotive industry, and metal products, its health is correlated with the space of the business cycle. For example, when a recession occurs, steel production decreases. The reason is that firms layoff people, cut budget, and reduce business expenditure (Bucur, Dobrota, Oprean-Stan, & Tanasescu, (2017).

On the other hand, retail food chain has a lower business risk, because it is not correlated with the business cycle. Retail good industry stays steady throughout the business cycle (Reilly & Brown, 2012).

· Discuss why you would not expect all industries to have a similar relationship trend to the economy. Provide an example of two industries that have a different relationship to the economy and explain the difference.

All industries have a different relationship trend to the economy, because some industries are sensitive to the business cycle, and others are not.

Cyclical industry, such as steel, autos, and airlines, grows faster when the economic cycle reaches its peak, but it also is impacted negatively when the economy is at the end of its cycle. It means that when the economy is doing well, cyclical industry generates high revenues. On the other hand, when the economy experiences an economic downturn, the industry will collapse or experience a decline in production, operations, growth, and net income (Reilly & Brown, 2012).

Noncyclical industry, such as retail food and household products, is not sensitive correlated to the business cycle. If the growth of the economy declines, the retail food chain will not experience a reduction in growth. It also will not increase in revenue during the growth of the economy, because it is not correlated to the space of the business cycle. However, if the retail food chain has expanded globally, it will either gain benefit or suffer from the foreign markets. For example, McDonalds has franchise locations in multiple countries. If the demand in Europe drops, McDonalds will experience a reduction in revenue and growth (Reilly & Brown, 2012).