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How to identify cyclical company?

 

A cyclical company is one whose performance and profitability are heavily influenced by economic cycles. In other words, a cyclical company tends to perform well when the economy is growing, and its performance may decline when the economy is in a downturn. Here are some ways to identify a cyclical company:

  1. Industry: Certain industries are more cyclical than others. For example, companies in the consumer discretionary sector, such as retailers and restaurants, are generally more cyclical than companies in the healthcare or utilities sectors.
  2. Revenue patterns: A cyclical company's revenue pattern tends to follow economic cycles. For example, during an economic expansion, a cyclical company's revenue will tend to rise as consumers and businesses spend more money. Conversely, during an economic contraction, a cyclical company's revenue will tend to decline as spending decreases.
  3. Sensitivity to interest rates: Cyclical companies tend to be more sensitive to changes in interest rates than non-cyclical companies. For example, companies in the housing or construction sectors are often affected by changes in interest rates because they impact consumer and business borrowing and spending.
  4. Stock price performance: A cyclical company's stock price tends to perform well during economic expansions and may underperform during economic contractions. The stock prices of cyclical companies are often more volatile than non-cyclical companies.
  5. Look at the company's beta: Beta is a measure of a stock's volatility relative to the overall market. Companies with betas greater than 1 tend to be more volatile and cyclical than the overall market.
  6. Capital Expenditures: Cyclical companies tend to have high capital expenditures, particularly during economic expansions when they are expanding capacity to meet demand.
It's important to keep in mind that not all companies in cyclical industries are necessarily cyclical themselves. You will need to conduct further analysis to determine if a company is truly cyclical or not.
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