A comparable company analysis is a process that enables the identification of similar organizations to be used as a comparison to understand the business and financial performance of the target company.
In short, we want to select companies, which present the same features as our target firm.
The objective, then, is to understand the competitive context of the organization we’re analyzing.
Joshua Rosenbaum and Joshua Pearl, authors of “Investment Banking,” offer us two main criteria to select our comparable companies:
- The business profile
- And the financial profile
These two profiles will help us find those companies that can be used as comparables for our financial analysis.
The business profile attains to qualitative aspects of the business, which we can synthesize in five properties:
In what sector does the target company operate?
Product and services
What are the core products and services the target company offers?
Customers and end markets
What’s the customer base? And which market is the company serving?
How does the target company get to its end customers?
What is the main market where our target company operates?
For instance, Apple Inc. operates in the consumer goods category and electronic equipment category. Its main products are iPhone, iPod, MAC (which make up most of its revenues).
Apple Inc. distributes its products mainly through its own retails stores and the main market is the U.S. (although the company operates worldwide and currently Greater China also makes up for a good chunk of the company’s sales).
The financial profile attains to quantitative aspects of the business. We are going to consider five main elements:
Market cap, revenues, net income
Average net margin, or gross margin last three or five years
Where does the revenue growth come from? Geography and product analysis
Return on investment
Net Income/Total Assets
What rating was the company assigned lately? Or what level of liquidity the company has?
For instance, Apple Inc. 2015 market cap surpassed $500 billion, with over $230 billion in revenues and over $50 billion in net profit.
As for the profitability, the company showed an average net margin (net income/sales) of 23% in the last five years. Its revenue growth came mainly from one product, the iPhone and one market, Greater China.
Select Comparable: Apple’s case study
It is time to select Apple’s main comparable.
For simplicity’s sake, here I want to highlight the fact that when selected Apple comparable I gave more importance to criteria such as geography, products and services, size, and profitability.
Apple has been able to achieve a dominant position in so many different industries in the tech world, and therefore it has also several direct competitors. For instance, in the smartphone industry, Apple’s direct competitors are Samsung, Sony, Lenovo and so on.
In the personal computer industry, Apple’s main competitors are Microsoft, Dell, HP, and Lenovo. We could go on forever. Although, my assumption here is that de facto Apple’s success was mainly due to its ability to integrate several products through a very intuitive interface that differentiated it from its competitors.
In short, I am assuming that the future battle in the tech industry will be played on the software side, rather than the hardware. Therefore, the two most prominent players, which are competing against Apple in this respect, are Microsoft and Google.
Understand that although the business and financial profiles criteria help use a lot in discerning the competitors of our target company personal judgment is a determinant factor.
For instance, if you believe that the future battle will be played on a different ground you may be tempted to select other comparable for Apple and that is fine. Or you could pick a larger group of comparable than I did. In short, you can personalize the analysis as much as you want if it gives a better picture of Apple’s overall competitive landscape.
- Successful Types of Business Models You Need to Know
- Business Analysis: How To Analyze Any Business
- The Complete Guide To Business Development
- Business Strategy: Definition, Examples, And Case Studies
- What Is a Business Model Canvas? Business Model Canvas Explained
- Blitzscaling Business Model Innovation Canvas In A Nutshell
- What Is a Value Proposition? Value Proposition Canvas Explained
- What Is a Lean Startup Canvas? Lean Startup Canvas Explained
- What Is Market Segmentation? the Ultimate Guide to Market Segmentation
- Marketing Strategy: Definition, Types, And Examples
- Marketing vs. Sales: How to Use Sales Processes to Grow Your Business
- How To Write A Mission Statement
- What Is Porter’s Five Forces And Why It Matters
- What Is A SWOT Analysis And Why It Is Important
- Always Be Closing: Five Effective Strategies For Closing A Sale