Why is Industry Analysis Important in Investment Banking? - dummies

Why is Industry Analysis Important in Investment Banking?

By Matt Krantz, Robert R. Johnson

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

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 or 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 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.