Colin Barry

Westlake Chemical Corp (BAV, Monday, Week 5)


What is financial analysis?
Identify key drivers of performance => assess past/present performance => determine whether firm is achieving its goals

Starts with understanding firm strategy (business model, risks, unique characteristics, competitors, lifecycle) and accounting choices.
==> If accounting choices do not reflect objectives/risks, maybe we should adjust to capture reality "better."

Other hints for ratio analysis:
-- Be careful about changes in firm's operations over time --- one-time items, new strategies, etc.
-- Cross-sectional analysis (firm vs. competitors) --- Do firms in the same industry have the same strategy? Sometimes, but often not...
-- Some items are often troublesome/hard to "bucket" (convertible securities on B/S, deferred taxes)

Thoughts on commodity firms
-- Need to understand/scrutinize cyclicality and utilization => central to valuation
-- Often huge changes in revenue without much change in assets
-- Macro perspective/factors = usually significant
-- Non-obvious insight: Commodity producers can do great when input prices rise IF demand is strong and supply/capacity is tight. Pass factor price increases on to customers...