DEFINITION of 'Industry Life Cycle Analysis'

Industry life cycle analysis is part of fundamental analysis of a company involving the examination of the stage an industry is in at a given point in time. There are four stages in an industry life cycle: expansion, peak, contraction, trough. An analyst will determine where a company sits in the cycle and use this information to project future financial performance and estimate forward valuations (e.g., forward price-earnings ratios).

BREAKING DOWN 'Industry Life Cycle Analysis'

Though not necessarily the case, the life cycle of a particular industry will follow the general economic cycle. Moreover, an industry life cycle may lead or lag an economic cycle, and can vary from an economic cycle's phases in terms of expansion or contraction percentages or duration of peak and trough stages. During an expansion phase in open and competitive markets, an industry will experience revenue and profit growth, drawing in more competitors to meet the growing demand for that industry's goods or services. The peak occurs when growth drops to zero; demand in the cycle has been met and prevailing economic conditions do not encourage additional purchases. Industry profits flatten out.

The contraction phase of the life cycle begins at some point after the peak arrives, characterized by falling profits as current period sales are lower relative to prior period sales (when demand was on the rise). The contraction phase could be concomitant with a recession in the economy or merely a reflection that short-term demand in the industry has been exhausted. During the contraction phase, the industry undergoes production capacity adjustments, whereby marginal players get shaken out and stronger companies lower their production volumes. Industry profits decrease.

This adjustment process, combined with a firming of the economy observed in employment and personal income numbers and the consumer confidence index, lead to the trough phase of the industry life cycle. At this stage, lower levels of industry demand are matched by the output capacity. As the economy gathers strength, the industry life cycle begins again with the expansion phase. As mentioned at the outset, an industry life cycle is typically tied to the economic cycle. The entertainment and leisure industry is an example of such an industry. The technology industry, on the other hand, has exhibited life cycle movements at variance with the economic cycle. For instance, industry profits have boomed even in times of no economic growth.

RELATED TERMS
  1. Economic Cycle

    The economic cycle is the ebb and flow of the economy between ...
  2. Peak

    Peak refers to the pinnacle point of economic growth in a business ...
  3. Market Cycles

    Market cycles include four phases of market growth and decline, ...
  4. Product Life Cycle

    The product life cycle describes the period of time over which ...
  5. Accounting Cycle

    An accounting cycle is the process of identifying, analyzing, ...
  6. Business Cycle Indicators (BCI)

    Business cycle indicators are a composite of leading, lagging ...
Related Articles
  1. Trading

    Market Cycles: The Key to Maximum Returns

    You need to understand the various phases of the market cycle to avoid bubbles and make the best investments.
  2. Investing

    Understanding Market and Full Risk Cycles

    Investor need to understand the four stages the markets tend to experience.
  3. Investing

    ETFs For Sector Rotation Strategies

    Find out how exchange-traded funds can take the bumps out of your investing style.
  4. Investing

    Stock Market's 'Absurdly Good' Returns Will Worsen In 2018

    Morgan Stanley sees a market peak in 2018 and offers recommendations to investors.
  5. Investing

    Steel Cycle Looks Good

    Buying cyclical stocks at the right time can be a great investment strategy, but it requires more than just trying to time a cycle to benefit.
  6. Investing

    A Look at the Buy Low, Sell High Strategy

    Learn how to buy low and sell high by using objective measures to identify opportunities. Buying low and selling high is the goal of every investor.
  7. Investing

    Why Apple's Suppliers Are Plunging As Mega Tech Thrives

    Technology stocks have been on a tear. But curiously, Apple suppliers Qorvo and Skyworks have gotten crushed recently.
  8. Investing

    Great Company Or Growing Industry?

    Look at the big picture when choosing a company - what you see may really be a stage in its industry's growth.
RELATED FAQS
  1. What are the most important steps in the accounting cycle?

    Understand the steps in the accounting cycle. Learn about each of the eight steps in the accounting cycle and why each one ... Read Answer >>
  2. What happens during the consolidation phase of an investor's life cycle?

    Unlike the accumulation phase – where emphasis is placed on growing wealth – the consolidation phase is a balance between ... Read Answer >>
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center