Comparing Companies#

Numbers in isolation mean little. A 15% operating margin could be excellent or poor depending on the industry and competitors. Effective analysis requires meaningful comparison.

Context is everything. A grocery store with 3% net margin might be outperforming peers, while a software company with 15% margin might be underperforming. Always compare like to like.

Why Comparison Matters#

Absolute vs. Relative Performance#

Metric	Company A	Good or Bad?
Net Margin	8%	❓ Need context
Net Margin vs. Industry Average (5%)	8%	✓ Outperforming
Net Margin vs. Top Competitor (12%)	8%	⚠️ Room to improve

The same number tells different stories depending on the benchmark.

Selecting Appropriate Peers#

Criteria for Peer Selection#

Same Industry/Sector - Core business similarity
Similar Size - Revenue or market cap range
Geographic Overlap - Similar markets served
Business Model - How they make money
Growth Stage - Mature vs. high-growth

Avoid Apples to Oranges

Don't compare a fast-food chain to a fine dining restaurant—even though both are "restaurants." Their business models, margins, and success metrics differ significantly.

Example Peer Groups#

Company	Good Peers	Poor Peers
McDonald's	Wendy's, Burger King, Yum! Brands	Darden (sit-down dining)
Microsoft	Google, Oracle, Salesforce	Apple (hardware-focused)
JPMorgan	Bank of America, Wells Fargo	Goldman Sachs (investment banking focus)

Normalizing Differences#

Size Differences#

Use percentages and per-share metrics instead of absolute numbers:

Metric	Company A ($10B)	Company B ($50B)
Operating Income	$1.5B	$6B
Operating Margin	15%	12%
Better performer	✓

Company A is smaller but more efficient.

Capital Structure Differences#

Companies with different debt levels aren't directly comparable on net income:

Approach	Why It Helps
Use EBIT or EBITDA	Removes interest expense impact
Compare EV/EBITDA	Enterprise value normalizes for debt
Analyze ROA, not just ROE	ROE is inflated by leverage

Accounting Differences#

Even within the same country, companies may make different accounting choices:

Depreciation methods - Straight-line vs. accelerated
Inventory valuation - FIFO vs. weighted average
Revenue recognition - Timing differences
Lease accounting - How leases are treated

Read the Notes

The notes to financial statements explain accounting policies. When comparing companies, check if they use different methods that could affect comparability.

Industry-Specific Metrics#

Different industries have different key metrics:

Banks and Financial Services#

Metric	What It Measures
Net Interest Margin	Spread on lending
Efficiency Ratio	Costs vs. revenue
Return on Assets	Often more meaningful than ROE
Non-performing Loans	Credit quality
Tier 1 Capital Ratio	Financial strength

Retail#

Metric	What It Measures
Same-Store Sales Growth	Organic growth
Sales per Square Foot	Store productivity
Inventory Turnover	Merchandise management
Gross Margin	Pricing power

Software/SaaS#

Metric	What It Measures
Annual Recurring Revenue (ARR)	Subscription base
Net Revenue Retention	Customer expansion
Customer Acquisition Cost (CAC)	Growth efficiency
Lifetime Value (LTV)	Customer profitability
Rule of 40	Growth + margin combined

Real Estate (REITs)#

Metric	What It Measures
Funds from Operations (FFO)	Cash generation
Net Asset Value (NAV)	Property value
Occupancy Rate	Asset utilization
Cap Rate	Investment yield

Building a Comparison Table#

Example: Retail Comparison#

Metric	Company A	Company B	Company C	Industry Avg
Revenue Growth	8%	12%	-2%	5%
Gross Margin	35%	38%	32%	34%
Operating Margin	8%	10%	4%	7%
Same-Store Sales	5%	8%	-4%	3%
Inventory Turn	6x	8x	4x	5x
Current Ratio	1.4	1.2	0.9	1.3
Debt/Equity	0.5	0.8	1.5	0.7

Analysis: Company B leads on growth and efficiency but has higher leverage. Company C is struggling and may face liquidity issues.

Common Comparison Mistakes#

Mistake 1: Wrong Peer Group#

Comparing a luxury brand to a discount retailer because both sell clothes.

Solution: Match on business model, not just industry category.

Mistake 2: Ignoring Size#

Comparing a startup's growth rate to an established giant's.

Solution: Compare to similar-sized peers or use appropriate benchmarks.

Mistake 3: Single-Metric Focus#

Declaring a winner based on one ratio while ignoring others.

Solution: Use multiple metrics for a balanced view.

Mistake 4: Snapshot Comparison#

Comparing a single quarter without considering trends.

Solution: Compare trends over multiple periods.

Mistake 5: Ignoring Business Differences#

Comparing companies with different growth strategies as if they should have identical metrics.

Solution: Understand each company's strategy and adjust expectations.

The Comparison Framework#

Step 1: Define the Question#

What are you trying to learn? Best performer? Most stable? Cheapest?

Step 2: Select Peers#

Choose 3-5 truly comparable companies.

Step 3: Gather Data#

Collect the same metrics for all companies for the same periods.

Step 4: Normalize#

Convert to comparable formats (percentages, per-share, etc.).

Step 5: Analyze Patterns#

Who leads on profitability?
Who has the strongest balance sheet?
Who's growing fastest?
Who's most efficient?

Step 6: Draw Conclusions#

Consider tradeoffs—the "best" company depends on your criteria.

Key Takeaways

Compare companies within the same industry and similar size
Use percentages and ratios to normalize for size differences
Apply industry-specific metrics (SaaS uses different metrics than banks)
Avoid common mistakes like wrong peer groups or single-metric focus
Consider business model differences when interpreting comparisons
Compare trends over time, not just single-point snapshots
Build comprehensive comparison tables with multiple metrics