NISM Certifications · NISM-Series-XV: Research Analyst · Industry Analysis
Industry A has sales growth that closely tracks GDP, but its profits fall sharply in recessions and rise sharply in booms, with high operating leverage and demand for durable capital goods. An analyst classifies industry A correctly as which of the following, and which statement best fits it?
Industry A is cyclical. Its earnings rise and fall more sharply than the economy because of high operating leverage and dependence on durable capital goods demand. Defensive industries stay stable in downturns, and a recession dip is not structural decline.
- ADefensive industry, because demand is stable in downturns
- BCyclical industry, because earnings swing more than the economyCorrect
- CGrowth industry, because it grows independent of the economy
- DDeclining industry, because profits fall in recessions
Explanation
Cyclical industries, such as capital goods and autos, show earnings that move with and exaggerate the business cycle, amplified by high operating leverage. Defensive industries have stable demand, and a cyclical fall is temporary, not structural decline.
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