comparable-company-analysis

Comparable Company Analysis: Business And Financial Profile

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.

Business Profile

business-profile

The business profile attains to qualitative aspects of the business, which we can synthesize in five properties:

Sector

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?

Distribution channel 

How does the target company get to its end customers?

Geography

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).

Financial Profile

financial-analysis

The financial profile attains to quantitative aspects of the business. We are going to consider five main elements:

Size 

Market cap, revenues, net income

Profitability

Average net margin, or gross margin last three or five years

Growth profile

Where does the revenue growth come from? Geography and product analysis

Return on investment

Net Income/Total Assets

Credit profile

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. 

Read: Business Analysis: How To Analyze Any Business

Other resources:

Companion Business Frameworks To The Comparable Analysis

Multi-Criteria Analysis

multi-criteria-analysis
The multi-criteria analysis provides a systematic approach for ranking adaptation options against multiple decision criteria. These criteria are weighted to reflect their importance relative to other criteria. A multi-criteria analysis (MCA) is a decision-making framework suited to solving problems with many alternative courses of action.

SPACE Analysis

space-analysis
The SPACE (Strategic Position and Action Evaluation) analysis was developed by strategy academics Alan Rowe, Richard Mason, Karl Dickel, Richard Mann, and Robert Mockler. The particular focus of this framework is strategy formation as it relates to the competitive position of an organization. The SPACE analysis is a technique used in strategic management and planning.

Psychosizing

market-analysis
Psychosizing is a form of market analysis where the size of the market is guessed based on the targeted segments’ psychographics. In that respect, according to psychosizing analysis, we have five types of markets: microniches, niches, markets, vertical markets, and horizontal markets. Each will be shaped by the characteristics of the underlying main customer type.

Agile Business Analysis

agile-business-analysis
Agile Business Analysis (AgileBA) is certification in the form of guidance and training for business analysts seeking to work in agile environments. To support this shift, AgileBA also helps the business analyst relate Agile projects to a wider organizational mission or strategy. To ensure that analysts have the necessary skills and expertise, AgileBA certification was developed.

Business Valuation

valuation
Business valuations involve a formal analysis of the key operational aspects of a business. A business valuation is an analysis used to determine the economic value of a business or company unit. It’s important to note that valuations are one part science and one part art. Analysts use professional judgment to consider the financial performance of a business with respect to local, national, or global economic conditions. They will also consider the total value of assets and liabilities, in addition to patented or proprietary technology.

Force-Field Analysis

force-field-analysis
Social psychologist Kurt Lewin developed the force-field analysis in the 1940s. The force-field analysis is a decision-making tool used to quantify factors that support or oppose a change initiative. Lewin argued that businesses contain dynamic and interactive forces that work together in opposite directions. To institute successful change, the forces driving the change must be stronger than the forces hindering the change.

Porter’s Value Chain Model

porters-value-chain-model
In his 1985 book Competitive Advantage, Porter explains that a value chain is a collection of processes that a company performs to create value for its consumers. As a result, he asserts that value chain analysis is directly linked to competitive advantage. Porter’s Value Chain Model is a strategic management tool developed by Harvard Business School professor Michael Porter. The tool analyses a company’s value chain – defined as the combination of processes that the company uses to make money.

VTDF Framework

competitor-analysis
It’s possible to identify the key players that overlap with a company’s business model with a competitor analysis. This overlapping can be analyzed in terms of key customers, technologies, distribution, and financial models. When all those elements are analyzed, it is possible to map all the facets of competition for a tech business model to understand better where a business stands in the marketplace and its possible future developments.

TOWS Matrix

tows-matrix
The TOWS Matrix is an acronym for Threats, Opportunities, Weaknesses, and Strengths. The matrix is a variation on the SWOT Analysis, and it seeks to address criticisms of the SWOT Analysis regarding its inability to show relationships between the various categories.

SOAR Analysis

soar-analysis
A SOAR analysis is a technique that helps businesses at a strategic planning level to:
Focus on what they are doing right.
Determine which skills could be enhanced.
Understand the desires and motivations of their stakeholders.

Porter’s Four Corners Analysis

four-corners-analysis
Developed by American academic Michael Porter, the Four Corners Analysis helps a business understand its particular competitive landscape. The analysis is a form of competitive intelligence where a business determines its future strategy by assessing its competitors’ strategy, looking at four elements: drivers, current strategy, management assumptions, and capabilities.

3C Analysis

3c-model
The 3C Analysis Business Model was developed by Japanese business strategist Kenichi Ohmae. The 3C Model is a marketing tool that focuses on customers, competitors, and the company. At the intersection of these three variables lies an effective marketing strategy to gain a potential competitive advantage and build a lasting company.

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