Financial Benchmarking

Financial benchmarking is simply carrying out financial analysis and comparing your results with certain standards. It involves comparing one firm’s performance with others in order to assess its competitive edge...

In an earlier post, we spoke about how investing cannot exist by itself in a bubble as it requires your knowledge of different elements. We also shared how a key source of information can be derived from a company’s historical financial statements.

While there are still so many ratios to share, it is important to add here that these ratios are not computed for the sake of computing alone. They have to be assessed and reviewed in comparison to others in the same industry amongst other things.

One of the ways to effectively analyze your ratio computations is by financial benchmarking. Benchmarks are generally standards or guidelines related to a specific industry.

Financial benchmarking is simply carrying out financial analysis and comparing your results with certain standards. It involves comparing one firm’s performance with others in order to assess its competitive edge, operational efficiency, profitability, and so on.

The objective for businesses isn’t just to compare but to be able to see the best practices of other companies and use them as benchmarks to improve that of your company. The results of the benchmarking process will help organizations tighten their cost for improved efficiency, create better streams of revenue, move with the changing business landscape and so on.

However, as an investor, financial benchmarking is a tool to assess the companies you want to invest in to see how well they stand in comparison with others within the same industry or the overall economic space.

With financial benchmarking, there are different aspects that financials can be compared against. They include:

Standards

Certain standards exist that serve as comparative tools for various aspects of any business. For example, on the explore page of the Yochaa app, you will find NSE indices that show the premium stocks, the NSE 3O and so much more.

There is also a section in the same explore page that shows the companies’ compliance status. Comparing to standards will give you the opportunity to watch companies that are doing poorly compared to pre-set standards.

Best-in-Industry

As the name implies, this involves comparing one business and its performance against those of other companies in the same industry

Key Things To Note

Compare Likes With Likes

A very important thing to do when benchmarking is to compare likes with likes. For example, if you want to purchase bank stocks, it is not just enough to compare one bank with another. Banks in Nigeria fall under three tiers: Tier 1, Tier 2 and Tier 3.

Tier 1 banks represent the solid banks with stable processes and so on. They are typically the most profitable and market leaders in various areas. However, Tier 3 banks are on the other end.

This doesn’t automatically mean banks in Tier 1 and best for investing; rather, it allows you manage your expectations as you cannot compare a bank with 10 years of experience with another that has over 10 decades of experience.

__Know What You’re Comparing__

With benchmarking, you will need to focus on one of more specific indicators. If you’re comparing dividends, find benchmarks on dividend. If it is profitability or market share, find companies in the same industry and compare the indicators amongst themselves.

Financial benchmarking allows you have a 360-degree view of not just the company but the industry it is situated in and the market. It will help you stay one step ahead other investors.

Written by Lawretta Egba.