- Identify the right industry-specific metrics before you compare companies, for example ARR and net dollar retention for SaaS and net interest margin for banks.
- Use a mix of quantitative benchmarks and qualitative factors to spot durable advantages like network effects or regulatory moats.
- Normalize metrics for size and capital intensity, and choose valuation multiples that match business economics, such as EV/EBITDA for capital heavy firms and EV/Revenue for high-growth software.
- Compare peers against sector medians and historical ranges to see who is under- or over-performing, then stress-test assumptions with scenario analysis.
- Avoid mixing incompatible metrics when ranking companies. Instead, create sector-specific scorecards and weight inputs by what matters most to the industry.
Introduction
Industry analysis is the process of understanding the forces, metrics, and benchmarks that shape companies within a particular sector. If you want to compare firms meaningfully, you need to use the metrics that reflect how their businesses actually make money.
This matters because comparing companies across sectors without context can lead you to false conclusions. How do you compare a bank that earns interest income with a cloud software company that sells subscriptions? You need a structured approach and the right tools, and you will get them in this guide.
You'll learn which industry-specific metrics to use, how to assess competitive dynamics, how to choose the right benchmarks and multiples, and practical ways to synthesize quantitative and qualitative inputs into a usable comparison. Ready to dig in and make your comparisons stick?
Understand Industry-Specific Metrics
Every industry has a set of core metrics that reflect its economics. Using the wrong metric is like measuring distance in pounds. Start by listing the metrics that matter for the sector you are analyzing, then collect consistent data for each peer you want to compare.
SaaS and Subscription Software
Key metrics include annual recurring revenue, ARR growth, gross margin, customer acquisition cost, and net dollar retention. Gross margins for mature SaaS firms typically run 70 to 80 percent, because costs to deliver software are lower than for physical products.
Net dollar retention tells you whether existing customers are expanding or contracting, and a ratio above 100 percent often signals strong product-market fit. Use EV/Revenue for very high growth names, and shift to EV/EBITDA once margins stabilize.
Banks and Financials
For banks, metrics like net interest margin, loan and deposit growth, efficiency ratio, and provision for credit losses are primary. Return on tangible common equity and the CET1 capital ratio are essential for assessing safety and capital adequacy.
Valuation typically uses P/TBV, price to earnings, or a blend that accounts for cyclical earnings. A community bank and a global investment bank will have different benchmarks, so scope your peer group carefully.
Consumer Goods, Industrials, and Energy
Consumer companies rely on gross margin, same-store sales, inventory turnover, and marketing efficiency. Industrials and energy firms are capital intensive, so look at capex to sales, free cash flow, and EBITDA margins.
Normalized EBITDA and free cash flow conversion rates are often more informative than headline profits when capex timing distorts earnings.
Assess Competitive Forces and Structural Advantages
Quantitative metrics tell you performance so far, but competitive forces tell you how durable that performance might be. Porter's Five Forces is a simple framework that you can use to structure your thinking about suppliers, buyers, new entrants, substitutes, and rivalry.
Types of Moats
Look for network effects, switching costs, scale advantages, cost leadership, and regulatory barriers. Network effects matter for platforms, where each new user increases value for others. Switching costs help subscription businesses retain customers over time.
Regulatory moats can be decisive in utilities, telecoms, and banking. For example $JPM and $BAC operate in a regulated industry where capital rules shape competitive dynamics.
Competitive Mapping
Create a simple competitive map that scores each company on market share, pricing power, cost structure, and product differentiation. Weight the categories by importance in that industry, and you'll see which firms score consistently higher.
Ask yourself, who has the lowest cost to serve customers, who can charge a premium, and who faces secular threats like disintermediation. This helps you go beyond raw growth rates when comparing peers.
Use Benchmarks and Relative Valuation
Benchmarks help you translate raw metrics into investment insights. Use sector medians, historical ranges, and select peer groups to establish what 'normal' looks like. These references make it clear when a company is an outlier for good or bad reasons.
Choosing the Right Multiples
Pick multiples that align with business economics. EV/EBITDA suits capital intensive firms. EV/Revenue works for early stage or unprofitable growth companies. For banks, price to tangible book value and dividend yield are common. For REITs, funds from operations is the right earnings proxy.
Always adjust multiples for growth and margin differences. A simple approach is to normalize margins to the peer group and then compare EV/EBITDA. Another option is to use PEG ratios to adjust P/E for growth.
Size and Capital Intensity Adjustments
Scale and capital intensity change how you interpret any metric. For instance, two industrial firms may have similar EBITDA margins, but if one has much higher capex needs, free cash flow will differ materially. Normalize by sales or assets where appropriate.
When comparing a high growth $SNOW to a larger $CRM, adjust for revenue growth and margin maturity. Use EV/Revenue to see whether the market is valuing future growth similarly across peers.
Integrate Quantitative and Qualitative Analysis
Good industry analysis blends numbers with judgment. Quantitative screens identify candidates, and qualitative work answers the why. You want to know not only who is outperforming, but why they are outperforming and whether that advantage will persist.
Scenario and Sensitivity Analysis
Create base, upside, and downside scenarios for growth, margins, and capital needs. Run sensitivity tests on key assumptions. If a company's valuation is only justified under an aggressive scenario, that tells you something important about risk.
For example, if $AAPL's services growth slows by 200 basis points, how does its valuation change relative to $MSFT? Modeling this helps you prioritize risks and opportunities when comparing peers.
Management Quality and Execution Risk
Assess whether management has a track record of meeting targets, allocating capital effectively, and communicating transparently. Execution matters a lot, especially in cyclical industries where timing and capital allocation determine outcomes.
Read earnings transcripts, look at historical guidance accuracy, and consider insider ownership and compensation structures. These qualitative signals often separate otherwise similar quantitative profiles.
Real-World Examples
Example 1, SaaS comparison: Compare $CRM and $SNOW. Suppose $CRM grows ARR 12 percent with 75 percent gross margins and 110 percent net dollar retention. $SNOW grows revenue 30 percent with 65 percent gross margins and similar retention. Use EV/Revenue to reflect high growth, but adjust for margin differences with an implied EV/EBITDA conversion scenario. A simple scorecard that weights growth, margin, retention, and profitability timeline will show which firm may justify a premium valuation.
Example 2, banks: Compare $JPM and $BAC with metrics such as net interest margin, loan growth, efficiency ratio, and CET1 ratio. If $JPM shows a higher CET1 ratio and lower efficiency ratio, it suggests stronger capital and better cost control. Use P/Tangible Book and ROE to see which bank is generating superior returns on capital while maintaining safety.
Example 3, industrials: Compare $XOM and a smaller oil services company using capex intensity, EBITDA margin, and free cash flow per barrel equivalents. Normalize for commodity price exposure and then compare free cash flow yields to understand which firm turns resource prices into shareholder cash more effectively.
Common Mistakes to Avoid
- Mixing incompatible metrics, for example using EV/Revenue for banks. Avoid this by picking industry-appropriate multiples.
- Ignoring capital intensity, which can hide true cash generation differences. Look at capex and free cash flow conversion.
- Overweighting short term growth spikes without checking sustainability. Check customer retention and recurring revenue components.
- Using headline margins without normalizing for one-time items. Adjust earnings for non-recurring charges before comparing.
- Failing to stress-test assumptions. Run downside scenarios to understand how fragile an outperformance claim is.
FAQ
Q: How do I pick the right peers for comparison?
A: Pick peers that share the same business model, customer base, and geographic exposure. For multi-line firms, segment-level comparisons are better than firm-level averages.
Q: Should I always use EV/Revenue for high-growth companies?
A: EV/Revenue is useful for unprofitable growth names, but you should transition to profit-based multiples as margins mature. Also adjust for gross margin differences and capital intensity.
Q: How important is macro context in industry analysis?
A: Very important. Interest rates, commodity prices, and regulatory shifts can change industry dynamics quickly. Always layer macro scenarios into your valuations.
Q: Can qualitative advantages outweigh quantitative weaknesses?
A: Yes, qualitative factors like a dominant network effect can justify temporary metric weakness, but they need to be durable. Look for evidence that qualitative advantages can convert into consistent financial outperformance.
Bottom Line
Comparing companies across sectors requires discipline. Start with the right metrics for the industry, benchmark peers and historical ranges, and combine quantitative analysis with a hard look at competitive advantages and risks.
Build sector-specific scorecards, run scenario tests, and prioritize the few metrics that drive long-term cash generation for that industry. At the end of the day, the goal is to identify firms that are structurally better positioned to convert industry dynamics into durable returns.
Next steps, pick an industry you follow, define its top 5 metrics, assemble a peer group of 4 to 6 companies, and create a simple scorecard to compare them. Repeat this process periodically and refine your weights as you learn more about what drives success in that sector.
