Industry-Specific Ratio Guidelines#

Not all ratios apply equally to all industries. A bank's P/E of 10 means something different than a software company's P/E of 10. Understanding industry-specific metrics and benchmarks is essential for accurate analysis.

Key Principle: Always benchmark against industry peers, not the broader market. A 5% net margin is terrible for software but excellent for grocery retail.

Technology Companies#

Software/SaaS Companies#

Key Metric	Why It Matters	Good Benchmark
Revenue Growth	Primary driver of value	> 20% (growth stage)
Gross Margin	Software economics	> 70%
Operating Margin	Path to profitability	> 20% (mature)
Rule of 40	Growth + Margin balance	> 40%
Net Revenue Retention	Customer stickiness	> 100%

Rule of 40

Rule of 40 = Revenue Growth % + Operating Margin %

A SaaS company with 30% growth and 15% margin = 45% (passing). This metric balances growth investment against profitability.

Valuation Metrics:

EV/Revenue (common for high-growth)
EV/EBITDA (for profitable companies)
P/E less relevant until profitable

Hardware/Semiconductor#

Key Metric	Why It Matters	Good Benchmark
Gross Margin	Product differentiation	40-60%
R&D as % of Revenue	Innovation investment	15-25%
Inventory Turnover	Cycle time	4-8x
Cash Conversion Cycle	Working capital efficiency	< 60 days

Watch For: Inventory buildup (obsolescence risk), cyclical demand patterns

Financial Services#

Banks#

Key Metric	Why It Matters	Good Benchmark
P/Tangible Book	Asset-based valuation	1.0-2.0x
ROE	Return on equity	> 10%
Net Interest Margin	Core profitability	2.5-3.5%
Efficiency Ratio	Cost control	< 60%
CET1 Ratio	Capital strength	> 10%
NPL Ratio	Loan quality	< 2%

Banks Are Different

Standard P/E analysis doesn't work well for banks. Use P/Tangible Book Value as the primary valuation metric, and focus on ROE, NIM, and loan quality ratios.

Avoid If:

NPL ratio rising significantly
Net Interest Margin compressing
Efficiency ratio > 70%

Insurance Companies#

Key Metric	Why It Matters	Good Benchmark
Combined Ratio	Underwriting profitability	< 100%
P/Book Value	Asset-based valuation	1.0-1.5x
ROE	Overall profitability	> 10%
Investment Yield	Portfolio returns	Varies by type

Combined Ratio < 100% means the company profits from underwriting before investment income.

REITs#

Key Metric	Why It Matters	Good Benchmark
FFO (Funds From Operations)	Cash flow proxy	Growing
P/FFO	REIT valuation	12-20x
Dividend Yield	Income return	4-7%
Occupancy Rate	Asset utilization	> 90%
Debt/EBITDA	Leverage	< 6x

FFO = Net Income + Depreciation - Gains on Property Sales

REITs use FFO instead of EPS because real estate depreciation doesn't reflect actual property value decline.

Retail and Consumer#

Retail (Grocery, Department Stores)#

Key Metric	Why It Matters	Good Benchmark
Same-Store Sales	Organic growth	Positive
Gross Margin	Pricing power	20-35%
Inventory Turnover	Merchandise velocity	4-12x (varies)
Sales per Sq Ft	Space productivity	Varies by format
Current Ratio	May be < 1	0.8-1.2 (normal)

Retail-Specific Notes:

Low current ratios are normal (fast inventory turnover)
Same-store sales growth matters more than total revenue growth
Online vs. physical mix increasingly important

Consumer Staples#

Key Metric	Why It Matters	Good Benchmark
Gross Margin	Brand pricing power	40-60%
Dividend Yield	Income stability	2-4%
ROE	Capital efficiency	15-25%
Revenue Growth	Low but stable	2-5%

Characteristics: Defensive, stable earnings, strong dividends, low growth expectations

Consumer Discretionary#

Key Metric	Why It Matters	Good Benchmark
Revenue Growth	Demand sensitivity	Cyclical
Operating Margin	Cost management	10-15%
Debt/EBITDA	Recession resilience	< 2.5x
P/E	Cyclical valuation	Varies with cycle

Watch For: High leverage before recessions, inventory buildup during slowdowns

Industrial and Manufacturing#

Industrials#

Key Metric	Why It Matters	Good Benchmark
Fixed Asset Turnover	Equipment utilization	> 2.0x
Operating Margin	Manufacturing efficiency	10-18%
Backlog/Revenue	Visibility	> 1x
Debt/EBITDA	Cyclical cushion	< 2.5x
Free Cash Flow Conversion	Earnings quality	> 80%

Cyclical Considerations:

Compare to mid-cycle earnings, not peak
Check backlog trends for demand visibility
Conservative leverage essential for downturns

Aerospace & Defense#

Key Metric	Why It Matters	Good Benchmark
Backlog Years	Contract visibility	2-5 years
Operating Margin	Program profitability	10-15%
FCF Conversion	Cash generation	> 90%
Book-to-Bill	Order momentum	> 1.0x

Healthcare and Pharma#

Pharmaceuticals#

Key Metric	Why It Matters	Good Benchmark
R&D as % Revenue	Pipeline investment	15-25%
Gross Margin	Drug pricing power	> 70%
Patent Cliff Exposure	Revenue risk	< 30% in 3 years
Pipeline Value	Future growth	Qualitative

Key Risks: Patent expirations, drug pricing pressure, clinical trial failures

Medical Devices#

Key Metric	Why It Matters	Good Benchmark
Gross Margin	Product value	60-70%
R&D Spending	Innovation	8-12%
Revenue Growth	Market share	5-10%
Operating Margin	Scale efficiency	20-25%

Biotech#

Key Metric	Why It Matters	Good Benchmark
Cash Runway	Survival	> 2 years
Pipeline Progress	Value creation	Advancing
P/E	Usually N/A	Not applicable
EV vs. Cash	Market's pipeline value	Premium = optimism

Biotech Caution

Most biotech companies are pre-revenue. Traditional ratios don't apply. Focus on: cash runway, pipeline milestones, partnership deals, and scientific merit. This is specialized analysis.

Quick Reference: Industry Ratio Focus#

Industry	Primary Ratios	Secondary Ratios
Software	Revenue Growth, Gross Margin, Rule of 40	EV/Revenue, FCF
Banks	P/TBV, ROE, NIM, NPL Ratio	Efficiency Ratio, CET1
REITs	P/FFO, Dividend Yield, Occupancy	Debt/EBITDA
Retail	Same-Store Sales, Inventory Turnover	Gross Margin
Industrials	Fixed Asset Turnover, Backlog	Operating Margin, FCF
Pharma	R&D %, Gross Margin, Patent Cliff	Pipeline value

Key Takeaways

Software: Focus on growth, gross margin, Rule of 40 (Growth% + Margin%)
Banks: Use P/Tangible Book, ROE, Net Interest Margin, NPL ratios
REITs: Use FFO (not EPS), P/FFO, dividend yield, occupancy rates
Retail: Same-store sales and inventory turnover matter most; low current ratio is normal
Industrials: Fixed asset turnover, backlog visibility, conservative leverage
Pharma: R&D spending, patent cliff exposure, pipeline value
Biotech: Cash runway and pipeline progress—traditional ratios don't apply
Always benchmark within industry—a 5% margin can be excellent or terrible depending on sector