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Competitive Analysis Using Financial Ratio Analysis
Published by slang July 5th, 2006 in Finance Role/KPA/KPI, Ratio AnalysisIn my articles on the changing role of finance, competitive analysis using financial data perhaps is one area where finance personnel can make a good contribution. This is in line with the SWOT (Strength, Weaknesses, Opportunities and threats) analysis where we scan outside for information to form certain decisions. Sun Tzu’ theory also states that we need to understand our enemy before we can defeat them.
Append below is a suggestive sample used for ranking competitors. It might be useful to perform this ranking exercise once every year.
The objectives are to see how our competitors are faring in terms of their financial status/health and we can learn from them particularly on areas where they excel at.
The ranking is based on the number of companies being survey. Say in this case we have 6 companies which are in the IT industry. So the ranking is from 1 to 6. The smaller number the better. Next, we add up all the numbers and total smallest number is the best.
Some of the areas deemed important are:
- Profitability
- Growth Trend
- Gearing
- Liquidity/Activity
- Per Share Data
- You may add other factors that you consider are not in the following table.( refer to my examples on the four perspectives of the balanced scorecard)
| COMPETITIVE ANALYSIS TABLE |
COMPANY | ||||||
| A | B | C | D | E | F | ||
| 1 | PROFITABILITY |
||||||
| 2 | IBT Margin(%) | 1 | 3 | 4 | 5 | 2 | 6 |
| 3 | IBT/ Shared Funds (5) | 1 | 2 | 3 | 5 | 4 | 6 |
| 4 | Return on Total Assets (%) | 1 | 6 | 5 | 4 | 3 | 2 |
| 5 | Revenue/Total Assets | 6 | 1 | 5 | 4 | 3 | 2 |
| 6 | Effective Tax Rate (%) | 1 | 2 | 3 | 4 | 5 | 6 |
| 7 | |||||||
| 8 | GROWTH TRENDS |
||||||
| 9 | REVENUE |
1 | 2 | 3 | 4 | 5 | 6 |
| 10 | Growth (%) | 6 | 5 | 4 | 3 | 1 | 2 |
| 11 | IBT |
6 | 5 | 4 | 3 | 1 | 2 |
| 12 | Growth (%) | 1 | 2 | 3 | 4 | 5 | 6 |
| 13 | Earning per Share |
5 | 4 | 3 | 1 | 2 | 6 |
| 14 | Total Assets |
1 | 4 | 3 | 2 | 5 | 8 |
| 15 | |||||||
| 16 | GEARING |
||||||
| 17 | Debt/Equity(%) | 1 | 2 | 3 | 4 | 5 | 6 |
| 18 | Debt/Capital Employed | 6 | 5 | 4 | 3 | 1 | 2 |
| 19 | |||||||
| 20 | LIQUIDITY/ACTIVITY |
||||||
| 21 | No of Days -Debtors/Revenue | 6 | 5 | 4 | 3 | 1 | 2 |
| 22 | No of Days - Stocks/Revenue | 6 | 5 | 4 | 3 | 1 | 2 |
| 23 | Current Ratio | 1 | 2 | 3 | 4 | 5 | 6 |
| 24 | Quick Ratio | 5 | 4 | 3 | 1 | 2 | 6 |
| 25 | Interest Cover | 1 | 4 | 3 | 2 | 5 | 8 |
| 26 | |||||||
| 27 | PER SHARE DATA |
||||||
| 28 | Net EPS (cents) | 6 | 5 | 4 | 3 | 1 | 2 |
| 29 | Shareholder Fund | 6 | 5 | 4 | 3 | 1 | 2 |
| 30 | |||||||
| 31 | TOTAL POINTS |
57 |
70 |
92 |
80 |
66 |
99 |
| 32 | RANKING BY LOWEST TOTAL POINTS |
1 |
3 |
5 |
4 |
2 |
6 |
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