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Portfolio Analysis, Portfolio concept

A financial term Portfolio Analysis, is primarily the study of certain portfolio regarding its performance, ROI and associated risks. The study or analysis is conducted with two objectives viz minimizing the risks and maximizing the returns.

Portfolio analysis is an examination of the components included in a mix of products with the purpose of making decisions that are expected to improve overall return. The term applies to the process that allows a manager to recognize better ways to allocate resources with the goal of increasing profits. It might also refer to an investment portfolio composed by securities.

When a company markets a range of different product or services it is required to conduct portfolio analysis periodically. This means to analyze each product separately in terms of profitability, contribution to the company’s income and growth potential. This analysis facilitates the identification of products that are not profitable at all or play poorly within the group.

The products are categorized by pre-defined criteria such as sales value, market share, gross profitability, contribution margin and life cycle. The results could clearly point to products that should be taken out of the market or simply receive fewer resources. It might also indicate that the company must increase its investments and efforts to some star products that have a higher potential. The analysis is made to improve the global portfolio’s performance since the ultimate objective is maximizing profit for shareholders.

Importance of Portfolio Analyze

  • The analysis is done in large multinationals with multiple product portfolios. A company should be aware of the financial health of the portfolios and their wellbeing. To know the top performers and strategies to maintain them the profit makers is the primary objective of Portfolio’s analysis.
  • No company will have all products in profit. There will be few products or product lines which may be loss makers. These are the cash consuming portfolios and the company should be aware of them so that they can either be discontinued or revamped. The idea is to make them less costly and more profit making.
  • Portfolio’s analysis helps the company to stay in sync with the vision, mission, and objectives. At times it may happen that a certain portfolio may be loss-making and the company may have been unknowingly being financing the dead weight for a long time. In these cases, the analysis will give a clear picture of the scenarios.

Advantages of Portfolio Analyze:

  • Determines the financial stability of the company along with product performance
  • Acts as trend analysis for the product to predict they are possible future in the market
  • Guide for investors and shareholders for financial assessment of the portfolios
  • The tool in decision making for the company to take product-related decisions whether to continue, change or discontinue products.

Disadvantages of Portfolio Analyze:

  • Doesn’t consider market influencers and political factors in the analysis which may cause sudden changes in the nature of the portfolio
  • It is difficult to perform Portfolio Analysis for a startup company or small-scale industries with limited product lines
  • Any of the major portfolio analysis tools do not consider internal factors of the company like a sudden change in management which may affect sales of the product.

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