Benjamin Graham: Comparing companies in the same industry

 In addition to examining a single company, the analysis should always include a comparison of several companies in the same industry. Quantitative analysis does not tell the whole story. In addition, qualitative analysis must be performed. The goal is not only to compare companies with each other. Examining companies in the same industry also tells about the opportunities offered by the industry. The end result may reveal that the business sector does not offer any company reasonable opportunities for long-term investments. Sometimes the analysis also offers a better investment target in the industry than the original company analyzed.

Entire business cycles offer the most reasonable time frame to examine. Usually, the length of a cycle varies from five to ten years. Using longer cycles can be a waste of time. Quantitative and qualitative analysis may require different time frames. It is difficult to assess the impact of management levels on the success of companies if there have been significant changes in the management of one of the companies being compared. This also applies to major changes in the business, i.e. large acquisitions or asset sales, which can make it difficult to make useful comparisons. All one-time items for companies should also be removed.

Graham thought that analysis should provide at least the following information when comparing companies:

• Price

• Number of shares

• Market value

• Debt

• Book value / Sales

• Profit margin

• Last earnings per share

• First earnings per share for the period under review

• Average earnings per share

• P/E ratio

• P/S ratio

• Dividend rate

• ROE

• Current ratio

• Tangible assets / debt

• Average EPS growth rate

• Average dividend payout ratio

• Number of tangible assets / market value

• Ratio of possible preferred shares or bonds to market value

• Possible special figures due to business sectors

Graham considered the P/E ratio to be the most important. Next comes the P/S ratio. Graham considered a P/E ratio higher than the average for the business sector to be a risk factor. According to Graham, when the market value is much lower than the turnover, the company has a good chance of improving results sharply as the general outlook for companies in the industry improves. Graham did not consider balance sheet comparisons to be significant factors when comparing companies if they did not show clear deviations, either in a good or bad direction. Graham left the significance of current results, average results and the profit trend to each investor to decide for himself. He focused most on the averages.

The final results of company comparisons mainly tell about the past, like other analyses. Therefore, you should remember that the company that did best in the past is not automatically a better performer in the future. This is more likely, but does not directly tell which company is the best investment target. It is easier to come to this conclusion if the companies operate in approximately the same geographical locations and sell almost identical products and services. This is the case when qualitative factors confirm the final results of the quantitative comparison.