Trend Analysis and Benchmarking#

A single ratio is a snapshot—useful but incomplete. Trend analysis reveals the movie: is the company improving, stable, or deteriorating? Benchmarking against peers shows whether performance is good or bad in context.

Key Principle: A company with ROE of 12% that was 15% three years ago tells a different story than one with ROE of 12% that was 8% three years ago. Direction matters as much as level.

Multi-Year Trend Analysis#

The 5-Year View#

Analyze at least 5 years of data to understand:

Long-term trajectory
Business cycle effects
Management consistency
Structural changes

Trend Categories#

Trend Pattern	Interpretation
Consistently improving	Strong execution, competitive advantage building
Stable	Mature business, predictable
Volatile	Cyclical business or operational issues
Consistently declining	Competitive pressure, structural problems
Recent reversal	Turnaround attempt—watch carefully

Example: Margin Trend Analysis#

Year	Gross Margin	Operating Margin	Net Margin
2020	42%	18%	12%
2021	43%	19%	13%
2022	41%	16%	10%
2023	39%	14%	8%
2024	38%	12%	7%

Interpretation: All margins declining over 5 years signals structural problems—likely increased competition, cost inflation not passed to customers, or operational issues.

Year-Over-Year Change Analysis#

What to Watch For#

Metric	Concerning Change	Positive Change
ROE	Declining 3+ years	Rising without leverage increase
Net Margin	Declining faster than revenue	Expanding with revenue growth
D/E	Rising significantly	Stable or declining
Interest Coverage	Falling below 3x	Rising above 5x
Asset Turnover	Declining	Improving

Calculating Change#

YoY Change = (Current - Prior) / Prior × 100

Example: ROE went from 14% to 12% Change = (12 - 14) / 14 = -14.3% decline in ROE

Sequential vs. Year-Over-Year#

Comparison Type	Use For	Limitation
Sequential (QoQ)	Spotting momentum shifts	Seasonality distorts
Year-over-Year	Eliminating seasonality	Slower to show change

Peer Group Benchmarking#

Selecting Appropriate Peers#

Criterion	Why It Matters
Same industry	Similar business dynamics
Similar size	Comparable operational scale
Same geography	Regulatory/market similarities
Similar business model	Comparable margin profiles

Peer Comparison Example#

Metric	Target Co.	Peer 1	Peer 2	Peer 3	Industry
Revenue (B)	$15.2	$18.5	$12.1	$14.8	—
Net Margin	8.5%	11.2%	9.1%	7.3%	9.0%
ROE	14%	18%	15%	12%	15%
D/E	0.8	0.5	0.7	1.2	0.7
P/E	16x	22x	18x	12x	17x

Interpretation: Target Company has:

Below-average margins vs. peers
Below-average ROE
Slightly above-average leverage
Below-average valuation (possibly deserved)

Relative Valuation Analysis#

Metric Relative to Peers	Implication
Lower P/E + better fundamentals	Potentially undervalued
Lower P/E + worse fundamentals	Deserved discount
Higher P/E + better fundamentals	Premium may be justified
Higher P/E + worse fundamentals	Potentially overvalued

The Best Combination

Look for companies with above-average profitability (ROE, margins) trading at below-average valuations (P/E, EV/EBITDA). This suggests the market may be undervaluing quality.

Industry Median Benchmarks#

Using Industry Data#

Industry	Typical Net Margin	Typical ROE	Typical D/E
Software	15-25%	15-25%	0.2-0.5
Retail	2-5%	10-20%	0.5-1.0
Banking	20-30%	8-15%	8-12x
Utilities	8-12%	8-12%	1.0-1.5
Pharma	15-25%	12-20%	0.3-0.8

Interpreting vs. Industry#

Company vs. Industry	Possible Reasons
Margin above median	Competitive advantage, premium positioning
Margin below median	Cost issues, competitive pressure, scale
ROE above median	Superior operations or higher leverage
ROE below median	Underperformance or conservative capital structure

DuPont Benchmark Analysis#

Compare each DuPont component to industry:

Component	Company	Industry	Assessment
Net Margin	8%	10%	Below—margin opportunity
Asset Turnover	1.5x	1.2x	Above—efficient asset use
Financial Leverage	2.0x	1.8x	Slightly above—acceptable
ROE	24%	21.6%	Above (via turnover)

Company achieves above-industry ROE through superior asset efficiency despite lower margins.

Combining Trends and Benchmarks#

The Complete Picture#

Analysis	What It Shows
Current ratio values	Where company stands today
5-year trends	Direction of travel
Peer comparison	Relative competitive position
Industry benchmark	Absolute standing in sector

Example: Complete Analysis#

Company XYZ - Technology Sector

Metric	2024	5Y Trend	Peer Avg	Industry
Net Margin	18%	↑ (from 14%)	16%	17%
ROE	22%	↑ (from 18%)	20%	19%
D/E	0.3	→ (stable)	0.4	0.35
Asset Turnover	0.9x	↑ (from 0.8x)	0.85x	0.8x

Conclusion: Company is:

Above peers and industry on profitability
Trending upward (improving)
Conservatively financed
More efficient than peers

This is a strong fundamental profile.

Warning: Trend Reversals#

Reversal Type	Signal
Positive → Negative	May indicate emerging problems
Negative → Positive	Possible turnaround—verify sustainability
Stable → Volatile	Business model disruption

Investigate Sudden Changes

Any significant single-year change (>20% in key ratios) warrants investigation. Read the 10-K management discussion and conference call transcripts to understand what happened.

Key Takeaways

Analyze at least 5 years of data to understand long-term trajectory - Direction (improving/declining) matters as much as absolute level - Year-over-year comparisons eliminate seasonality effects - Select peers by industry, size, geography, and business model - Compare to both peers and industry medians for complete context - Above-average profitability + below-average valuation may indicate opportunity - Investigate sudden reversals or significant single-year changes (>20%) - Combine trend analysis with benchmarking for the complete picture