The stock of a wonderful firm with superior management and strong performance measured by sales and earnings growth can be priced so high that the intrinsic value of the stock is below its current market price and should not be acquired. In contrast, the stock of a company with less success based on its sales and earnings growth may have a stock market price that is below its intrinsic value.

To achieve excess equity returns on a risk-adjusted basis, investors must be able to distinguish sources of risk in the investments they make. Although return expectations can be established by evaluating firm strategies within the industry, the analyst must always examine the risk that the strategy may be flawed or that assumptions about competition and cooperation may hold only in good economic environment.

One of the first steps in analyzing an industry is the determination of the amount of industry concentration. If the industry is fragmented, many firms compete, and the theories of competition and product differentiation are most applicable.

To achieve excess equity returns on a risk-adjusted basis, an investor must find companies that can earn return on equity (ROE) above the required rate of return and do this on a sustained basis. For this reason, global industry analysis centers on an examination of sources growth and sustainability of competitive advantage.

Traditionally, the industry life cycle is broken down into stages from pioneering development to decline. Of course, one must be careful in industry definition. Industry life cycles are normally categorized by rates of growth in sales. The stage of growth can clearly vary in length.

Business cycles represent a complex control system with many causes and interacting private and governmental decisions. For example, companies invest in plant and equipment and build inventories based on expected demand but face the reality that actual demand does not continuously meet expectations.

The valuation of a common stock is usually.conducted in several steps. A company belongs to a global industry and is based in a country. Hence, country and industry analysis is necessary. Companies compete against global players within their industry, Studying a company within its global industry is the primary approach to stock valuation.

Influences other than the economy are part of the business environment. Demographics, changes in technology, and political and regulatory environments also can have a significant effect on the cash flow and risk prospects of different industries.