Common ratio to do a comparable analysis of growth and mature company

CFA General
#1

Is there any ratio to do a comparable analysis of growth and mature company.

#2

I’d like to help you, but I have to confess that I don’t understand the question you’re raising. Would you mind rewording it, please? If I can understand the question, I think I can probably answer it.

One thing is certain: As companies grow, they must change how they perform routine, recurring tasks. If they don’t, they will end up with too-too many people on the payroll. That shows up when the analyst compares annual revenue per full-time-equivalent employee of small public companies in the same or similar business with that same ratio of the company being analyzed.

#3

Say, I want to comparison to of two companies, one company is in growth stage and one is in value stage.Is it possible to compare both companies, if so which matrix, should be used to compare these companies .

#4

I don’t quite understand the question that you’re asking. Would you mind defining the phrase “common ratio,” please? I think that would be helpful.

#5

Fist of all I am sorry,english is not my first language.
I meant to say,Is there any ratios which can be used to compare growth with a value company. We often compare one growth company with another growth company or value co with another value company using some ratios like PE or PB etc
Same way i want to compare a mature co( value) with a early stage co ( growth) using some ratios. Is it possible to do so?

#6

Two companies in the same industry, one is hyper growth and the other is a mature company with steady cash flows. Maybe an Facebook and Snap Chat (just thinking out loud).

If the earnings are extremely volatile, one could standardize with volatility. The PEG ratio comes to mind.

Instead of using the growth rate of earnings in the denominator, maybe you can use the standard deviation of earnings.

Thoughts?

#7

One of the most important considerations in doing securities analysis is, as we say in English, to “compare apples to apples and oranges to oranges.” Therefore, because mature companies and growth companies have very different levels of risk, even if they’re in the same or a similar industry, trying to compare them in a single analysis is not something that I have ever done. It is also something that I cannot see myself ever doing. Taking shortcuts in securities analysis is invariably a bad idea, and the kind of comparison you’re asking about is just one more example of that. I wish you good luck on Level III.

#8

Well there is a range of ratios you could use, depends what you are trying to achieve.

If you are simply trying to show that one is ‘growth’ and the other is ‘value’, then it should be straightforward:

  • raw sales growth say YoY, Yo3Y, forward CAGR or whatnot: probably growth >> value
  • margin say EBIT/EBITDA margin: probably value >> growth but also value likely has stable to mildly growing margin while growth is more volatile
  • depreciation/capex : probably value is closer to 100% while growth is << 100%
  • cash conversion (EBITDA/FCFF): probably growth <0 while value >> 0
  • ROCE: probably value >> WACC while growth is < WACC

Then you could ask - how to value these two? If you are looking to do valuation comps, then value is a poor comp to growth and vice versa. More likely you look for growth stocks to comp with your growth name, and value stocks to comp with your value name. Then, based on these two comps universes, you can run a benchmarking analysis to see if your target co is closer to one or the other universe.

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