How To Compare (4 Of 5)

How To Compare (4 Of 5)
<a href="">TheDigitalWay</a> / Pixabay

How to Become Financially World Class, Part 4

In this five-part video series Andrew Stotz, PhD, CFA walks you through all the basics you need to know about World Class Benchmarking and How to Make Your Company Financially World Class.

Special Offer – , Dr. Andrew Stotz (AKA the author here) is hosting a free webinar for ValueWalk readers on Nov 21st – Enrollment is limited – enter here!

Brook Asset Management had a strong first quarter, is shorting This US education stock [Exclusive]

Brook Asset Management was up 7.27% for the first quarter, compared to the MSCI GBT TR Net World Index, which returned 3.96%. For March, the fund was up 1.1%. Q1 2021 hedge fund letters, conferences and more In his March letter to investors, which was reviewed by ValueWalk, James Hanbury of Brook said returns during Read More

Get Our Activist Investing Case Study!

Get the entire 10-part series on our in-depth study on activist investing in PDF. Save it to your desktop, read it on your tablet, or print it out to read anywhere! Sign up below!

We know that business is hard, but we believe that the financial aspects should NOT be. World Class Benchmarking is a clear-cut financial tool for that takes the finances of your company from complicated to simple, from scattered to focused, and from individual to team.

How to compare

  • Compare to your nearest competitor?
  • To other competitors in your country?
  • To other companies in your region?
  • To assure you are truly Financially World Class compare to global peers

Benefits of comparing to nearest competitor

  • Easy to calculate, you don’t need a finance expert for that
  • Gives management team one target to focus on
  • Consumers may be making a choice between these two companies
  • It is the “most comparable” company

Weaknesses of comparing to nearest competitor

If that competitor is performing poorly, then beating them may not be a strong measure of success. Your future competition could come from many other companies. Focusing only on beating your nearest competitor may get management team overly focused and then miss opportunities and miss the new competitors approaching.

Comparing brands (Apple Macbook to Dell XPS) is sometimes a very close comparison. But comparing brands is not the same as comparing companies, with brands we rarely have financial disclosure.

Comparing against a direct competitor, such as Coke vs. Pepsi, may not be as simple as it seems. PepsiCo’s snack foods division accounts for more than 50% of its revenue, while Coca-Cola’s revenue comes almost all from beverages. You could try to breakout PepsiCo’s beverage division and compare that to Coca-Cola’s. However, most companies try to reveal the minimum of financial details amount about divisions so getting this data may be hard.

In conclusion, the direct comparison method sounds good, and sometimes works, but in practice there are many flaws. After years as an analyst doing directly comparison my answer is… “There is no perfectly comparable company.”

Strengths of comparing to competitors in your country

  • If financial information is available then this is relatively easy to calculate
  • Gives management team a focus of being number one in your country
  • Makes sense to your employees as you are mainly competing against these companies
  • By comparing against a group it removes many of the weaknesses of not having a direct competitor to compare against

Weaknesses of comparing to competitors in your country

Financial information is often not available, or only once a year. The companies may not be very competitive, beating them would not make your company great. Employees do not see themselves as “World Class”, but rather best in country.

Strengths of comparing to competitors in your region

  • Overcomes the problem of if the companies in your country are not that financially impressive
  • Gives management team a focus of being number one in your region
  • These days trade is more free, regional trade is more real

Weaknesses of comparing to competitors in your region

Companies in your region may still not be financially impressive. Competition can come from outside your region, being best in region may not make you “World Class”.

Borders maybe more open, but regional competition may never impact your company (e.g. say you are a property company). If your country’s economy is weak your rank will fall relative to other, unrelated economies that are strong.

To assure you are truly Financially World Class compare to global peers

  • No two companies are alike, but some are more alike than others
  • We use The Global Industry Classification Standard (GICS®) from MSCI & Standard & Poor’s
  • Currently there are 11 Sectors
  • We rank each company against peers within the sector that that company belongs to

Why we compare the way we do

We believe there are no perfectly comparable companies. Though it would be nice to find, there is just no true apples to apples comparisons in this world – No two companies are comparable. Apple vs. Samsung – NOPE. ExxonMobil vs. CNOOC – NOPE.

It is hard to get the depth of data needed on any direct competitor or competitors so this research is usually done on an “ad hoc” basis. We can do such a study, and even if sporadically produced it can be helpful, but it is not a consistent measure of performance, rather it is a one-time benchmark. Our data is updated every 3 months, this keeps the challenge for management real.

It is rare for one company to do just one business line, so sometimes people think about comparing brands (like Coke vs. Pepsi) but we need to compare the finances of the companies, as we rarely get data on brands.

In addition, companies will grow and shrink different divisions of their businesses over time, if you get overly focused on that it may be misleading.

What if your one little comparable company is doing poorly? You are beating them but you are not world class. By comparing against global competitors we can know if a company is truly “World Class”. And that is such a “Big, Hairy, Audacious Goal” (credit to Jim Collins).

There are more than 40,000 companies that an investor can buy in the stock markets

There are more than 40,000 companies that an investor can buy in the stock markets. It may not feel like it but ultimately you are competing for capital against these companies. Building a “World Class Company” means you are always assured of having a steady flow of capital.

Our measure can be applied to an unlisted company or a listed company. This can be a good tool for companies that want to prepare themselves to listed companies to prepare for an IPO. If they do this they can help to assure that their company can be listed at the highest price, generating the highest value.

Investors need well-defined investment categories to effectively implement portfolio strategies. Similar companies can be similarly impacted by business and economic factors (e.g. oil price, interest rates, etc.).

Investors are using a consistent and unbiased classifications to compare companies, industries, and consider regional and global trends. In 1937 Standard & Poor’s created the Standard Industry Classification (SIC). In 1999 Standard & Poor’s and Morgan Stanley Capital International (now known as MSCI) created a single, consistent global sector and industry definitions called Global Industry Classification Standard (GICS®).

Investors use it, so should you.

What you have learned

  • To be sure your financial performance is truly World Class, compare to global peers
  • This broad comparison is against the same size companies in the same sector
  • This measure is stable, global, understandable, available, and it works to increase the value of your business

Article by Become A Better Investor

Previous article Majority Of Large Chinese Companies Have Less Than Five analysts Covering Them
Next article iPhone X Face ID Fooled With A $150 Mask, Should You Worry?
Dr. Andrew Stotz, CFA is the CEO of A. Stotz Investment Research, a company providing institutional investors with ready-to- invest portfolios in Asia that aim to beat the benchmark through superior stock selection. The company also provides buy- and sell-side clients with financial models to value any company in the world and World Class Benchmarking to determine what companies are financially world class. Previously, as Head of Research at CLSA, Andrew was voted No. 1 Analyst in Thailand in the Asiamoney Brokers Polls for 2008 and 2009. He was also voted No. 1 Analyst in Thailand in the 2009 Institutional Investor magazine All-Asia Research Team Report. Andrew earned his PhD in finance at the University of Science and Technology of China in Anhui province, with a focus on answering questions raised by fund managers and analysts during his career about picking stocks and managing portfolios. In addition, Andrew has been a lecturer in finance for 22 years at various universities in Thailand. Since 2013, he has been the president of the CFA Society of Thailand. He is also the author of How to Start Building Your Wealth Investing in the Stock Market.

No posts to display