Chapter 9

Sizing Up the Industry


check Creating a comparison set of peers for industry analysis

check Seeing how companies differ from one another in key areas

check Comparing and contrasting companies’ growth and other metrics

check Measuring differences of companies’ profitability and valuation

check Understanding why investment banking requires knowledge of the complete industry

The theory of relativity is a mind-blowing concept from Albert Einstein that says, among other things, that space and time are best understood in context to each other. The importance of comparison isn’t just heady science.

Consider what happens in a classroom. If a student gets an A on a paper, she may be overjoyed until she finds out that all the other students got A’s, too. Her A isn’t as meaningful when, in context, it’s not all that unusual. The dreaded “bell curve” is a way to separate the average students from the truly exceptional ones.

The importance of comparison doesn’t stop in the classroom. Even the super-rich understand this principle. What’s the fun of having a 50-foot yacht when someone else at the country club has a 100-foot one?

The same theory of relativity applies to investment banking, especially when it comes to studying the financial statements and financial ratios. As you see in Chapter 8, although many insights can be gleaned from the financial statements, much of the deeper analysis requires putting the data into context. And the best way to really size up a company’s financials is to compare them against similar companies.

Industry analysis is the technique investment bankers use to put financials and financial ratios into perspective. In this chapter, you learn the tricks of the investment banking trade when it comes to sizing up companies’ financial results to get deep insights into companies and the industries they operate in.

Performing an Industry Analysis

It’s not enough for investment bankers to dive into the financials of the company they’re interested in. Sure, digging into that one company’s financial statements and ratios is a critical first step to understanding its profitability, efficiency, and valuation.

But imagine you’ve created a beautiful spreadsheet that crunches down the company’s gross profit margin, return on assets, and price-to-book. Now what? Those numbers are helpful when compared with previous years at the company, but in isolation there’s only so much investment bankers can glean from them.

Investment bankers know that understanding a company and its financial situation requires an industry analysis. Taking a broader look at a company’s performance shows investment bankers where a company is especially weak or strong, giving clues of what financial overhauls or tweaks might be needed.

Understanding why industry analysis is important

“It’s all relative,” is a common cliché but one that’s especially true when it comes to financial analysis. Financial ratios can vary wildly based on the industry a company is in.

Warning Don’t make the folly of making judgments about a company based on its absolute financial ratios. Just about every type of financial ratio is highly dependent on the characteristics of the industry the company is in. Not taking the time to compare the ratios to the industry will likely lead to faulty or biased conclusions.

Investment bankers can use industry analysis to help them in several key areas, including the following:

  • Pinpointing unusual areas of the business or anomalies: Some of the most telling aspects of a company’s financials are those areas that are outliers. Finding a company where debt loads are unusually low versus the industry where growth is sluggish can be a way to identify investment banking products that may apply to that company.
  • Finding areas in which the competition is taking the lead: CEOs and company management are acutely aware of what the competition is doing. If another company in the industry is posting monster revenue growth, you can be sure the CEO is wondering how to get a piece of that action. It may be a new hit product that has been a success with consumers or a new part of the world where demand is untapped.
  • Identifying areas management is keyed in on: CEOs are constantly looking around to see how their peers are doing. That’s especially true with CEO pay, where companies actually examine the paychecks of CEOs, and use that as a way to know how much to pay their CEO. But the same goes for most of the items on the financial statements. If a company, for instance, isn’t boosting revenue as quickly as others in the industry, you can be sure the CEO is trying to find out why. Investment bankers may be called on to help the company tap that source of growth.

Creating a comparison universe

Before you can start doing some serious analysis of the industry, you have to define what the industry is and who the big players in it are. The first part of an investment banker’s industry analysis is to define which companies are to be included in the universe.

Picking the correct companies to include in the comparison universe is important since the mix can have a big sway on the conclusions reached. Putting companies into categories used to be more difficult, but the development of classification systems and the decreased role of hard-to-classify conglomerates has made the job much easier.

Remember Conglomerates are large and widely diversified companies that oversee a collection of somewhat unrelated businesses. Conglomerates were very popular in the 1960s, because low interest rates allowed companies to scoop up businesses using borrowed money. Conglomerates were a way for investors to diversify their portfolios, before the creation of index mutual funds, which spread investors’ risks over dozens of stocks. But since the 1960s, conglomerates fell out of favor, with General Electric and Warren Buffett’s Berkshire Hathaway being two of the most famous survivors.

There are several ways that investment bankers are able to generate their universes to compare with. Building the list takes quite a bit of research and may require you to consider different companies, and perhaps toss them out of the universe if you decide they’re not applicable.

Digging into the Global Industry Classification Standard

Finding all the players in an industry may seem overwhelming, but much of the work may be done for you.

There’s a massive industry organization system called the Global Industry Classification Standard (GICS), which groups companies much like zoologists have a way of organizing similar animals. Just as animals are placed into a genus and species, companies are put into sectors and industry groups. GICS was developed by investment professional firms Morgan Stanley Capital International (MSCI) and Standard & Poor’s to assist in the analysis of companies. In other words, all their work makes your job a bit easier. You can take a look at the entire GICS structure at

Tip Individual investors often confuse sectors and industry groups, but they’re actually quite different ways to look at groups of companies. Sectors are broad categories that roll up a number of relevant industry groups. Industry groups can then be further sliced into individual industries.

There are 11 sectors, or main groupings that categorize all the major areas of businesses. Those 11 sectors are then broken down into 24 industry groups. And those 24 industry groups break down into 69 industries.

It may help to see a summarized version of the breakdown of sectors and industry groups, as in Table 9-1.

TABLE 9-1 The 11 Sectors


Select Industry Groups

Select Industries



Energy Equipment and Services, Oil, Gas, and Consumable Fuels



Chemicals, Construction Materials, Containers and Packaging


Capital Goods

Aerospace and Defense, Building Products

Commercial and Professional Services

Professional services


Airlines, Road and Rail

Consumer Discretionary

Automobiles and Components

Auto Components, Automobiles

Consumer Durables and Apparel

Household Durables, Leisure Equipment


Distributors, Internet and Catalog Retailers

Consumer Staples

Food, Beverage, and Tobacco

Beverages, Food Products

Household and Personal Products

Personal Products


Healthcare Equipment and Services

Healthcare Equipment and Supplies

Pharmaceuticals, Biotechnology, and Life Sciences

Biotechnology, Life Sciences and Services



Commercial Banks, Thrifts and Mortgage Finance

Diversified Financials

Diversified Financial Services, Consumer Finance, Capital Markets

Information Technology

Software and Services

Internet Software and Services, IT Services

Technology Hardware and Equipment

Communications Equipment, Computers and Peripherals

Communication Services

Telecommunication Services

Diversified Telecommunication Services, Wireless Telecommunication Services, Media, Entertainment



Electric Utilities, Gas Utilities, Water Utilities

Real Estate

Real Estate Management and Development

Source: MSCI, S&P Global Market Intelligence

Here’s an example: Let’s say you wanted to look into the investment banking industry. (Imagine that, given the book you’re reading right now!) It turns out that the Investment Banking and Brokerage sub-industry is a member of the Capital Markets industry. The Capital Markets industry is a part of the Diversified Financials industry group, which is part of the Financials sector.

When you figure out which sector and industry group the company you’re studying belongs in, you can get a good start on your industry universe. For instance, imagine that you’re preparing an analysis of tech giant IBM. You may be tempted to compare it with other tech giants Microsoft and Apple. And it’s true, IBM is part of the Information Technology sector, as are Microsoft and Apple. But IBM is in the Software and Services industry group and the IT Consulting industry. IBM gets most of its revenue from consulting, not from selling hardware or operating systems. IBM’s peers in the IT Consulting industry includes firms like Accenture, Cognizant Technology, and Infosys.

Seeing who companies say their rivals are

If anyone knows who a company’s competitors are, it’s the company’s management team. Companies in the same industry are intensely competitive with one another. And you can be sure they know which companies are trying to steal business from them.

Tip For a variety of reasons, companies don’t like to talk publicly about their competitors very often. But investment bankers paying close attention to the regulatory filings will see that, from time to time, companies may name firms they consider to be competitive, at least with part of their business. These lists of competitors may be named in the company’s 10-K or 10-Q. Another treasure trove of competitive information comes when a company in the industry files to sell shares to the public in an initial public offering (IPO). In the IPO prospectus (a document that a company selling securities provides to interested investors that describe the investment), the company’s investment bankers are required to disclose a list of all the companies that are considered competitive.

IBM, for instance, gives great detail about its competitors for each of its major business units in its regulatory filings. IBM lists Accenture, Capgemini, DXC Technology, Fujitsu, and Alphabet (Google) as rivals to its Global Business Services consulting segment. IBM lists computer service firm SAP, Microsoft, and Oracle as competitors in its Cognitive Solutions unit. Big Blue, IBM, even lists Cisco Systems as a rival for its lending unit, called Global Financing.

Checking out the peers from which boards of directors set CEO pay

If there’s one area in which CEOs don’t want to slip behind their competition, it’s their own pay. Each year, companies’ boards of directors determine how much to pay the CEO and other top management. It’s a much-watched process that many investors pay attention to. But more important to investment bankers than the amount being doled out to the CEO is the process used to determine the pay. Companies pay close attention to the other companies in the industry, and in the process, they do much of the industry analysis for investment bankers.

Remember Whether CEOs make too much or not enough is beyond the scope of this book. But for investment bankers, the part of the proxy statement that shows the universe of companies with which a company compares CEO pay is priceless.

Adjusting the industry comparison universe

At this point, you’ve discovered how to take a good first crack at creating an industry comparison universe. Creating the initial list using the GICS or even the list of competitors from the company’s CEO compensation list is a great starting point. You can even combine these approaches to come up with a master list.

But depending on the analysis you plan to do, you’ll need to winnow the list down a bit. There are times when certain companies may technically be rivals, but in reality, the companies aren’t really comparable. You’ll want to toss these outlier companies out of your industry comparison universe. A company may not be an appropriate peer for investment banking analysis when that company is

  • Not a pure-play competitor: There may be times when a company’s biggest competitor is actually a unit embedded inside a larger firm. When this happens, comparing a company against another company that gets most of its business from an unrelated area can be inappropriate.
  • At a different point in its lifecycle: Investors pay particular attention to the size of companies they’re comparing against. Some financials can be highly dependent on the size or market share of a company. For instance, it would be a bit outlandish to compare the revenue growth of a large company with a dominant market share with a company that just started.
  • Being propped up by artificial means: Periodically, a company in the industry may not really be operating on its own two feet. Companies that emerge from bankruptcy protection may have their debt wiped out, making their liquidity ratios not all that applicable. A company may get a bailout from the government or private investors, which can also skew its numbers. We’re looking at you American International Group and General Motors.

Unearthing Company Trends and Common sizing the Financial Statements

Astrologers know there’s only so much you can learn by gazing at just one star in a telescope. Part of the true mystery of the heavens is answered by knowing how the stars have changed over time, as well as how they behave in relation to each other.

Studying companies may not be as galactic as star gazing, but insightful investment bankers know that it also requires putting financial results into context. Investment bankers traditionally look to put financial statements into perspective by

  • Looking at trend data: A single year of data only tells you so much. You can look up on the income statement that a company reported net income of $10 million. So what? What’s even more important is how much the company made the previous year. If the company reported net income of $5 million the previous year, it just doubled its profit. But if net income was $100 million the year before, the company is regressing.
  • Common sizing the balance sheet: Common sizing is a technique used by investment bankers to put line items on the financial statements into relationship of the total. It’s appropriate to put a company’s individual assets into perspective, for instance, as a percentage of the company’s total assets. Common sizing data can be very valuable when compared to the numbers from rival firms.
  • Common sizing the income statement: There’s no reason for the balance sheet to have all the fun with common sizing. The technique can also be applied to the income statement, which compares expenses and profit to total revenue. The real magic of common sizing the income statement, though, comes from comparing one company’s numbers to the numbers of others in the industry.

Comparing growth rates

Serious investment bankers don’t just look at one year’s financial statements. For in-depth analysis of financials, investment bankers rely on several years of financial data, which are the raw ingredients of trend analysis, in which analysts try to see whether key indicators of the company’s performance are on the upswing or headed downward. And to take this trend data to the next level, investment bankers are looking for ways to compare with related companies’ trends as well.

Remember There’s a magical formula you need whenever calculating the change in one number from another. This calculation will be the way that all the percentage changes you read about in this chapter are devised. Here’s the way to remember it:

Percentage Change = ([New Number – Old Number] / Old Number) × 100

Let’s use a basic example: Imagine a corn plant was 10 inches tall before a farmer poured a bucket of fertilizer on it. After two weeks, the plant grew to be 18 inches tall. Here’s how much the plant grew:

Percentage Change = ([18 – 10] / 10) × 100 = 80%

This formula is critical when measuring trends.

Looking at an example: Dell

Instead of stepping you through the theoretical ways that trend analysis may aid the investment banker, it’s prudent to take a real example. It’s an old example — but a relevant one — because enough time has passed so we can see how everything turned out.

Perhaps you recall that, in 2013, Michael Dell expressed interest in taking his computer company, Dell Computer, private in a leveraged buyout. News reports indicated that Dell’s revenue growth was slowing relative to the industry and that being private would allow the company to make investments needed to remain competitive. (Investment in new equipment and expansion is called capital expenditures).

An investment banker would use trend data to quantify this financial story. The first step would be to get Dell’s revenue and capital expenses for several years, both of which are available from Dell’s income statement and statement of cash flow from the company’s latest 10-K filing. If you need a refresher course on how to access the 10-K, flip back to Chapter 6. To save you time, Table 9-2 is a presentation of several years of Dell’s revenue and capital spending.

TABLE 9-2 Dell’s Revenue and Capital Spending

Fiscal 2013 ($ millions)

Fiscal 2012 ($ millions)

Fiscal 2011 ($ millions)





Capital expenditures




Source: Dell 10-K filing for fiscal 2013, ending February 1, 2013

Interpreting the results

Table 9-2 looks pretty, but at its face, you can’t glean much trend information until you convert the absolute numbers into percentage changes. And when you do the math, you generate a table like the one in Table 9-3.

TABLE 9-3 Dell’s Revenue and Capital-Spending Trends

Fiscal 2013 (% change)

Fiscal 2012 (% change)




Capital expenditures



Now the Dell story becomes crystal clear and quantified. Revenue did fall off 8.3 percent in fiscal 2013, certainly not a positive development. But even more alarmingly, the company cut back its capital expenditures by 24 percent. That’s a disturbing trend because technology companies rely on innovation and new products for revenue growth in future years. At this point, investment bankers can begin to see the problem that Dell is trying to address.

Measuring trends next to industry

Before investment bankers can jump to any conclusions about what they’ve seen in the trends, it’s important to measure those trends against other companies. After all, maybe Dell’s 8.3 percent decline in revenue is actually less severe than that reported by other tech companies. And perhaps, the rest of the industry is cutting back in capital spending, so a 24 percent reduction isn’t all that unusual. Knowing this would put the trend data in a much different light.

Remember Using the techniques from earlier in this chapter, you prepare an industry comparison list. Using the list of peers from the computer hardware industry, you create a chart showing the revenue and capital expenditures trends of the rivals, which looks like Table 9-4.

TABLE 9-4 Computer Hardware Trends

Revenue Change Comparable 2013 Period (% change)

Capital Expenditures Change in Comparable 2013 Period (% change)










Source: Company filings (Apple 12-month period ended March 2013; Hewlett-Packard 12-month period ended January 31, 2013; NCR 12-month period ended March 2013)

Sizing up Dell’s results, it’s clear the company was in danger of falling behind the investments being made by other computer hardware companies, Apple and NCR. But it’s interesting to note that Dell’s closest direct rival, Hewlett-Packard, was similarly pulling back on its capital expenditures in light of declining revenue. Investment bankers can use this industry analysis to draw deeper conclusions.

Remember There’s no rule that says the companies have to end their fiscal years on December 31. Sometimes companies in the same industry are on different reporting calendars, meaning they report quarters ending in slightly different months, as is the case with Dell and most of its peers. This is just a limitation of reporting that investment bankers must use judgment to work through.

So did it go? A healthier Dell goes public

Dell took the plunge in October 2013 and went private. It was a radical move because the company had been a publicly traded stock for 25 years. Dell was a widely held stock as it was a member of the Standard & Poor’s 500. But that all ended in 2013 after Dell said it would exit the Nasdaq exchange in a $24.4 billion leveraged buyout deal. Michael Dell himself plus private investors, aided with a loan from Microsoft, bought the company. The thinking was this: As a private company, Dell wouldn’t be subject to short-term financial goals to appease shareholders. Dell could make costly investments in its business to reinvigorate — if not save — itself.

The company remained private for about five years. Management evaluated every aspect of the company, with the luxury of escaping the relentless scrutiny of the public markets and quarterly profit demands. Massive layoffs, restructurings, and investment in faster growing areas of technology helped Dell reduce reliance on the slower growing personal computer industry.

It took years, but Dell reemerged in 2018. The company returned to public markets by first buying a competitor, EMC, in 2016. That move put Dell at the top of the fast-growing computer storage industry. EMC also owned a majority share of cloud-computing company VMware. Dell took its time fixing its core business and integrating EMC. And then on December 28, 2018, Dell went public by buying the rest of VMware, which was public. The company used VMware’s public stock listing, changed the name to Dell Technologies, and put the symbol back to DELL.

Did the complicated move work? So far, it appears so. Not only did Dell survive (albeit in a different form), it’s growing again. And it has dramatically boosted its capital expenditures, shown in Table 9-5, which it needs to do to stay competitive.

TABLE 9-5 The New Dell’s Revenue and Capital-Spending Trends

Fiscal 2019 ($ Millions)

Change From Fiscal 2015




Capital expenditures



Comparing leverage

The balance sheet is where companies list out all the assets it owns and the liabilities it owes. Examining the balance sheet by itself can be a valuable exercise. One of the best uses of the balance sheet is finding out how much debt a company has, or how leveraged a company is. Leverage can magnify profits during the good times but spell major financial troubles if the company slows down or if interest rates rise.

The true power of the balance sheet, though, shines through when using the financial statement to compare the financial resources of a company with that of its peers. But here’s the problem: How do you compare the assets and liabilities of different companies that may be in the same industry but are of dramatically different sizes? If a company has a total load of debt of $1.9 billion, is that high, low, or average compared with the industry?

Remember The tool to adjust for companies having different scales is called common sizing. Common sizing is a financial technique in which all the aspects of financial statements are put in relation to the total. When common sizing the balance sheet, investment bankers divide all the assets and liabilities by the total assets. This exercise of common sizing puts the numbers into perspective and makes them truly comparable with the industry.

Using a real example, it’s easier to see how common sizing works. Hershey, the giant food company, showed a breakdown of its liabilities (refer to Table 7-1). That table showed that in 2018, the food company’s short-term debt is equal to 15.6 percent of its total assets, the current portion of the company’s long-term debt is equal to just 0.07 percent of total assets, and long-term debt has reached 42.2 percent of assets. That information is very useful to the investment banker because it shows the company is largely counting on debt that doesn’t come due for more than a year. (Keep in mind that while short-term debt, the current portion of long-term debt, and long-term debt are among Hershey’s biggest liabilities, there are others, so the percentages don’t add to 100 percent.)

But the investment banker may want to take things a step further by common sizing the balance sheets of rivals, creating a table like the one shown in Table 9-6.

TABLE 9-6 Comparing Balance Sheets


Short-Term Debt as % of Total Assets

Current Portion of Long-Term Debt as % of Total Assets

Long-Term Debt as % of Total Assets





General Mills








Source: S&P Global Market Intelligence, based on packaged foods and meats industry as of December 2018 for Mondelez, May 2019 for General Mills

The common sizing industry analysis shows the investment banker that Hershey has more of its liabilities held in the form of long-term debt, showing the company seems to be trying to take advantage of low interest rates.

Comparing various profit margins

Comparisons are also important to investment bankers trying to gauge how profitable companies are. And again, common sizing is a tool that investment bankers can use to rank and compare a company’s profit-producing power.

Remember When common sizing the income statement, you’re putting all the company’s expenses into perspective by comparing them to the company’s revenue. This technique, done by dividing all the elements of the income statement by the company’s revenue, gives you a quick way to see how the company’s profit margins compare with other companies’.

To show the power of common sizing with the income statement, you can try it out using the airline industry. The airline industry is known for its often tight profit margins and cutthroat competition. To dig deeper, you can common size the income statement of Delta Air Lines and then see how that matches up to the industry. Notice how after Delta’s income statement is common sized in Table 9-7, you get a keen look into the company’s profitability and where its biggest expenses lie.

TABLE 9-7 Common Sizing Delta’s 2012 Income Statement

Income Statement Item

Absolute 2012 Amount ($ millions)

Common Sized (% of revenue)

Total revenue



Cost of goods sold



Gross profit



Selling, general, and administrative expenses



Operating income



Net income



Source: Delta Air Lines, S&P Global Market Intelligence

The common sizing analysis of Delta Airlines confirms that the airline is definitely a relative low net margin business. The company earned just 8.9¢ of every dollar of revenue in 2018 as net income. A vast majority of the company’s revenue is chewed up by the company’s cost of goods sold, which includes jet fuel. It’s important to note, though, that this is actually an improvement. Back in 2012, the company’s net profit was just 3 percent of revenue.

But to understand how Delta stacks up, it’s important to common size the income statements of its rivals, to create a chart like the one in Table 9-8.

TABLE 9-8 Common Sizing Delta’s Rivals

Gross Profit % of 2018 revenue

Operating Income % of 2018 Revenue

Net Income % of 2018 Revenue

United Airlines




Southwest Airlines




Delta Air Lines




Source: S&P Global Market Intelligence

The common sizing analysis of the companies in the airlines industry definitely shows how the industry has little control over its direct costs, such as jet fuel. The gross profit as a percentage of revenue is pretty consistent in the mid-20 to low-30 percent range. Where the airlines have the most power to control costs is in overhead costs. This information is helpful for investment bankers because they may look for financial products to help airlines boost their profitability.

How a Company Stacks Up: Comparing the Key Ratios

How do investment bankers know if the annual bonus they got was big? There’s an old saw on Wall Street that says you got a good bonus as long as it’s bigger than the one the person sitting next to you got.

That’s a flippant way to look at pay, but that way of thinking spans beyond the cubicles in the investment bank’s high-rise to the way that companies’ financials are analyzed. Companies’ financial results, especially when synthesized and looked at as financial ratios, can’t be fully understood in isolation. Investment bankers must compare companies’ financial ratios with the financial ratios at other firms in the industry. Such comparisons give investment bankers deeper insights into how a company is performing outside the ups and downs of the industry.

Sizing up valuation

Valuation (the process of putting a price tag on a company) is one area where most investors appreciate the value of comparison. In Chapter 8, we fill you in on the value of financial valuation ratios, including the price-to-earnings (P/E) ratio and the enterprise value–to–EBITDA (EV/EBITDA) ratio.

Remember Flip back to Chapter 8 if you need a refresher on what ratios to measure and how to calculate them.


The P/E ratio tells you how much investors are paying for a claim to $1 of a company’s earnings. When it comes to valuation ratios, the P/E is certainly one of the most famous because many people use it as a benchmark to tell them if a stock is relatively cheap or expensive.

The trouble is, though, that the P/E doesn’t tell you much by itself. The ratio is most valuable when compared to that of similar companies or even the entire stock market. Keep in mind, too, that P/E ratios rise and fall as stock prices fluctuate and earnings change.

Remember There are several different ways to calculate a P/E, as shown in Chapter 8, so you’ll want to use the same method for all the companies in your universe. It’s best to compare a company’s P/E to that of its peers, but it can also be interesting to look at how a company’s P/E compares to the market over different points in time. You can see the trailing P/E of the Standard & Poor’s 500 over different times in history in Table 9-9 for a comparison.

TABLE 9-9 S&P 500’s P/E through Time


Operating P/E (Trailing)

December 31, 2018


December 31, 2017


December 31, 2011


December 31, 2010


December 31, 2000


December 31, 1990


Source: S&P Dow Jones Indices


The P/E is a helpful benchmark of company’s value in large part due to simplicity. If you have access to a computer and financial websites, you can get a company’s P/E pretty quickly. But investment bankers usually dig deeper, using EV/EBITDA, where EV is enterprise value and EBITDA is earnings before interest, taxes, depreciation, and amortization. You can read more about what these measures are and what they tell you in Chapter 8.

But for now, know that EV/EBITDA is best appreciated when used to look at a valuation of a company compared with its peers. Calculating EV/EBITDA requires a calculation using data, pulled from the financial statements, like what you see in Table 9-10.

TABLE 9-10 Calculating EV/EBITDA for Hershey in 2018

Data Point

Financial Statement Line Item ($ millions)

Market value


Cash and short-term investments


Total debt and minority interest


Total revenue


Cost of goods sold


Selling, general, and administrative (SG&A)


Depreciation and amortization


Source: S&P Global Market Intelligence as of December 31, 2018

The first task for the investment banker is to calculate enterprise value. Using the formula in Chapter 8, you know the following:

Enterprise Value = Market Value – Cash and Short-Term Investments + Total Debt and Minority Interest

Referring to Table 9-10, you can find all the data you need to plug into the formula to find:

Enterprise Value = $22,487.2 – $823.79 + $4,706.23 = $26,369 million

Take a deep breath. You’re halfway there. Now it’s time to calculate EBITDA. The formulas for EBITDA is as follows:

EBITDA = Total Revenue – Cost of Goods Sold – Selling, General, and Administrative + Depreciation and Amortization

Again, inputting the data from Table 9-10, you find:

EBITDA = $7,791.1 – 4,198.2 – 1,797.4 + 0 = $1,795.5 million

Last, you divide enterprise value by EBITDA to find that Hershey had an EV/EBITDA ratio as of December 31, 2018, of 14.7. But what does that mean? To find out, you perform the same calculation with other firms in the packaged foods and meats industry and you find something like you see in Table 9-11.

TABLE 9-11 Comparing EV/EBITDA





General Mills


Source: S&P Capital IQ as of Dec. 31, 2012

Comparing Hershey’s EV/EBITDA to select peers in its industry shows that investors are willing to pay a greater premium for shares of Hershey over General Mills. But the valuation is on par with that of Mondelez. This is important information for the investment bankers to consider when evaluating options for perhaps issuing stock or conducting a merger.

Comparing total debt-to-equity

Managing a company’s mix of debt and equity financing is a big part of what investment bankers do for their clients. Learning to size up a company’s total debt-to-equity ratio is a key part of understanding its capital structure (the mix of the sources of funds a company uses to operate itself). Chapter 8 shows how to calculate and analyze debt-to-equity ratios. But it’s important, too, to see how the debt-to-equity ratio can vary greatly among companies, as you can see in Table 9-12.

TABLE 9-12 Comparing Total Debt-to-Equity


Total Debt-to-Equity in 2018





General Mills


Source: S&P Capital IQ, data for December 31, 2018, except through May 2019 for General Mills due to fiscal year

Investment bankers can see, at a quick glance, that Hershey is much more dependent on debt than its peers, relative to equity financing. It’s a reminder that Hershey will be more interested in investment banking products that may help it manage its leverage.

Sizing up companies on their efficiency

Efficiency ratios help investors, and investment bankers, see how well management is handling the cash entrusted to it by its investors and bondholders. For this reason, efficiency ratios, such as return on equity can be somewhat of a report card to judge management. You can find out everything there is to know about return on equity (ROE) in Chapter 14.

But just remember that before being critical of management, using ROE, you have to put this ratio into context. Some industries generate higher returns than others and some businesses require larger investments in plants and equipment. It’s natural for some industries to have higher returns on equity.

Industry ratios

If you notice anything in reading this chapter, it’s that there’s practically no end to the ways investment bankers can study and pick apart a company. You can dig deep into the financial statements and off-the-shelf financial ratios like P/E and EV/EBITDA. But investment bankers with deep industry insights often follow financial measures that are more closely tied to the specific industry. Many industries have key benchmarks that are particularly useful to them.

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