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Saturday, August 7, 2010

Understanding Peer Stock Analysis

Peer analysis is one of the most important steps for selecting a company over the other in the same industry.
Before you look at various parameters to evaluate a stock, its always good to identify peer group companies for the same stock. It helps investors to do a comparative study for group of stocks with similar nature and scale of business. 

First of all, lets understand the concept of peer companies. Peer Company does not only mean companies in the same industry. Peer companies are companies which also have comparable revenue.

For Example:

Company “A” has revenue of 100 Crores

Company “B” has revenue of 5,000 Crores

Company “C” has revenue of 7,000 Crores

Company “D” has revenue of 150 Crores

Company “E” has revenue of 200 Crores

All these companies are in the same industry. But all are not peer companies. Company “B” and “C” are peer companies, while company “A”, “D” and “E” are another set of peer companies.

The simple logic is that you cannot compare the financial parameters of a huge company with a small one. Its not justified and will not give a correct picture of which company is relatively good or bad. But when you compare the relatively same size of companies in terms of market capitalization then it gives a better idea of which company is better then the other based on certain financial parameters.

Once you select peer group of companies, you will look at various financial metrics to compare companies. Investors should note that this process of research does take time but its more then worth the effort if one can spot the right company. Moreover, investors put their hard earned money into companies and businesses. So it’s wise to make a well informed decision by spending some time doing personal research.