How can you determine how well a firm is doing in comparison to its competitors? The answer to this vital question could be easier to determine than you think. Here are some ideas to get you started.
Several publications organize companies by industry and provide aggregate industry financials.
The print publication Value Line, while only covering large public companies, provides a summary page of each industry with financial ratios pertinent to that industry. Standard & Poor’s does a similar analysis in its Industry Surveys. Mergent’s Industry Review is another
good source of ranked lists by specific industry financial measures.
Whether the firms listed in these sources are relevant or not, the financial items and ratios they select may be useful metrics for your own comparison.
Another level of analysis is offered by a group of books that distill financial averages and ratios by SIC (Standard Industrial Classification) or NAICs (North American Industrial Classification) codes. The Almanac of Business and Industrial Financial Ratios, published annually by Leo Troy, allows you to find the financial ratios of firms by SIC code and by asset size. Other books of this genre include Dun & Bradstreet’s Industry Norms and Key Business Ratios, and Risk Management Association’s Annual Statement Studies.
Build your own
In addition to these “off-the-shelf” sources, you can also build your own comparison.
First, you’ll need to identify your industry peers. A good source of peer groups are the 10-Ks and proxy statements of public companies. Each 10-K has a “Competition” section listing specific companies believed to be competitors. The proxy statement is required to include a section comparing firms’ stock performance to self-selected peer groups.
Most company directories list companies by SICs or NAICs. Business information publishers such as Global Access, One-Source, Dun & Bradstreet, and Ward’s are likely to have assigned a code to your business that allows you to retrieve a list of similarly coded firms. Or, categorize your firm yourself using the codes supplied by the U.S. Census Bureau.
Keep in mind that if your business is not a “pure play,” and involves many different lines, then it might be best to treat each business area separately and find benchmarks for each segment of your firm. It is also important to remember that the firms you benchmark against may themselves be diversified. You should concentrate on the most focused firms for your comparison.
Reprinted with permission from HBS Working Knowledge, (c) 2002
A listing of the location of resources mentioned in this article at Baker Library and on the Baker Library Home Page is provided below:
Reference HG4501 .V265
Standard & Poor’s Industry Surveys
Mergent’s Industry Review
Reference HG4961 .M68
Almanac of Business and Industrial Financial Ratios
Reference HG4028.B2 T68
Dun & Bradstreet’s Industry Norms and Key Business Ratios
Reference HG4028.B2 I54
Risk Management Association’s Annual Statement Studies
Reference HG4028.B2 R6
D&B million dollar directory
Reference HC102 .D8
Reference HG4057 .W38
U.S. Census Bureau
(North American Industry Classification System)