How to do Sector-Wise Comparison of Companies?
Created on 20 Oct 2023
Wraps up in 6 Min
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Updated on 28 Oct 2023
Let's kick off today's article with a simple question: When you're in the market for purchasing a new car or a mobile phone, what's your go-to strategy for making the right choice? You'd probably say you compare performance, check out the features, and, without a doubt, consider different models and brands, right? But would you ever find yourself comparing an iPhone with a Micromax phone or calculating the fuel cost for a car and a plane? Not likely.
In the world of consumer choices, you've got your own set of criteria. Similarly, while analysing companies, you'll go through a whole toolkit, from ratios and stock screening to deep dives into financial statements.
But let me tell you, when we compare one company with another, it's like evaluating cricket legends - Sachin and Virat. You need to understand who's leading and why. Peer-to-peer comparison, yaani "tulna," has become a crucial tool for investors, analysts, and even those with a casual interest. But why is it so important?
Sector Wise Comparison of Performance
Different industries have their unique set of parameters for comparison.
As we explore these sectors, if you're unsure about filtering stocks, don't worry. Just take a look at our guide, "Smart Stock Selection: Your Ultimate Screening Guide."
In the Indian market, we've got 11 major sectors, each with its own set of Key Performance Indicators (KPIs). Take a look at the image below ⤵️
Today, in our quest to expand our knowledge, we'll explore the KPIs of three of the following sectors to enhance our understanding:
This will help in analysing companies' performance across various sectors. Toh chaliye shuru karte he!
Now, here's a quick heads-up: when we're comparing two companies in a particular sector, it's like exploring a library; there's a whole shelf of knowledge to delve into. These factors we're diving into today are essential, but they're not the whole story.
|If you're curious about the crucial things you should definitely check while analysing a company, we've got an article that covers this. Check: Don't Overlook These Things Before Investing in a Company.|
Ah, the banking sector – it's like the financial epicentre of our lives, right? It's where we stash our savings, dream of those loans for our new adventures, and trust our financial future. In the lively world of the Indian economy, the banking sector takes the stage as a major player.
Take a look at the Key Performance Indicators that make it tick.
- Net Interest Margin (NIM): This tells you how much money a bank earns from the interest on its loans. Why is it important for banks? Well, a higher NIM means they're making more money from lending, which is great for their bottom line.
- Non-Performing Loans (NPL) Ratio: Think of this as a report card for a bank's loans. It reflects the quality of the loans in their portfolio. A low NPL ratio means most of their loans are getting paid back, showing a healthier bank.
- Cost-to-Income Ratio: It shows how efficiently they manage their expenses. Banks aim for a low ratio, indicating they're not overspending to earn a profit.
- Loan-to-Deposit Ratio: Indicates how well a bank is utilising deposits for lending. A balanced ratio is key for sustainable lending and growth.
Take a look at the image below to understand the other important financials taken from Ticker by Finology.
Information Technology (IT) Sector:
Alright, so when you're comparing performance of the companies, think of it like deciding on the best smartphone features. You want the perfect combination. So, here are the key elements to consider:
- Revenue Growth: This measures how quickly a company's sales are increasing year after year. For IT companies, it's like tracking how fast their services are in demand. Faster growth often indicates a strong position in the market and the ability to adapt to changing tech trends. 📈
- Profit Margin: Think of this as the company's profit efficiency. It shows how much profit the company makes from every rupee it earns. For IT companies, a healthy profit margin suggests they're managing their resources well and delivering their services efficiently. 💪
- Employee Attrition Rate: Indicates how well the company is retaining its talent. In the IT world, talent is like gold. A lower attrition rate means the company can retain skilled employees, which is vital for maintaining consistent service quality and innovation. 👨💻
- Return on Assets (ROA): This metric shows how effectively the company uses its assets to generate profits. In the IT sector, it's all about maximising the value of digital assets, like software and intellectual property. A higher ROA is a good sign of asset efficiency and financial health. 👍
Apart from the parameters we've discussed, there's a whole set of common factors laid out in the image below 👇
For instance, when you're comparing the Indian IT giants, you might notice that their Revenue Growth and Profit Margins have their own stories to tell. It's like a game of one-upmanship – TCS might shine in one aspect, Infosys might steal the spotlight in another, and the list goes on.
|Now, here's a tip to supercharge your analysis: I highly recommend checking out "IT Sector: Investor Challenges and Solutions." You don't want to miss out on navigating this dynamic sector.|
Let's talk about something that keeps our lights on, our gadgets running, and our lives buzzing – the energy sector.
As the sun sets over this sector, you'll need to focus on the below-mentioned metrics:
- Revenue per Megawatt: Think of this as measuring how wisely a company turns its power generation capacity into money. In the energy sector, this helps you gauge how efficiently the companies are making profits from their power production. ⚡
- Capacity Utilisation Rate: It tells you how much of the power generation capacity a company is using. In the energy sector, it's crucial to see if they're making the most of what they have. 👌
- Energy Mix: Shows the percentage of energy generated from different sources (e.g., coal, renewable energy, etc.). 💡
- Earnings Before Interest and Tax (EBIT) Margin: This is like the money you keep after paying your rent and taxes. In the energy sector, it shows how profitable a company is before those financial deductions. 💸
So, in the energy sector, these parameters are like the vital signs of a company's health. They tell you how efficiently they're making money, using their capacity, where their energy comes from, and how much they're pocketing before interest and taxes. These insights are like…
The Bottom Line
These KPIs are like the spices in a diverse Indian curry, each bringing a unique flavour to the analysis of a company's performance.
However, remember that the significance of these KPIs can vary within each sector. Industry dynamics and specific business strategies can alter the interpretation of these metrics.
Aise awesome knowledge ke baad, agar aapne ye nahi padha toh kya kia? Top 5 Fastest Growing Industries in India.
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