Financial Benchmarking: Comparing Company Performance Relative to Peers

Why Financial Benchmarking Skills  

Suppose the SaaS company you’re analyzing posts a 10% net profit margin. It looks solid until you compare it to similar SaaS businesses and the average margin is 15%.

The financial performance of a single company becomes significantly more meaningful when it is compared to industry benchmarks and similar companies. Benchmarking reveals whether a company is truly outperforming, underdelivering, or simply keeping pace. These insights help analysts fine-tune key assumptions and build financial models based on realistic, market-based inputs.

This guide to financial benchmarking breaks down two main analytical methods and why peer selection matters. It also explores how to interpret comparisons to gain valuable insights for your specific analytical objectives.

Financial Benchmarking: Industry and Peer Analyses

Financial benchmarking allows us to compare a company’s financial ratios against those of its peers. 

Two types of benchmarking — industry analysis and peer benchmarking — show a company’s performance relative to the industry it operates within and comparable companies. Financial analysts often use both approaches to gain a comprehensive understanding of performance.

Industry Benchmarking

Industry benchmarking, or industry analysis, compares a company’s financial performance to a wide range of similar companies in the same sector. These companies may differ in size, strategy, or geographic reach, but they operate within the same industry classification.

This method helps analysts:

• Identify overall industry trends, challenges, and opportunities.
• Understand how a company performs relative to the broader market.
• Assess which areas drive valuation premiums or drag on investor returns.

However, the results of industry benchmarking may be less precise because the comparison includes many different types of companies. Some financial metrics may not reflect meaningful differences, especially when business models or operating environments vary widely.

Peer Group Benchmarking

Peer benchmarking focuses on comparing a company’s financial performance to a smaller group of similar businesses. These companies usually operate in the same market segment, serve similar customers, and use comparable business models.

This approach is helpful for:

• Understanding how a company performs compared to competitors or similarly structured companies.
• Identifying areas where the company is more or less efficient than others.
• Recognizing specific strengths that give the company an advantage in its market.
• Making more relevant comparisons of key performance indicators (KPIs).

Because peer benchmarking looks at companies with similar characteristics, it gives more granular (detailed) insights than industry benchmarking. This makes peer benchmarking an especially useful approach in assessing a company’s competitive positioning and strategic execution.

The Critical Importance of Peer Selection in Benchmarking

The quality of peer benchmarking depends on how well you choose comparable companies. Analysts spend a large portion of their time carefully selecting peers because this step directly affects the accuracy and usefulness of the results.

With some companies, finding truly comparable companies is difficult. Even businesses in the same sector may differ in size, customer base, geographic reach, or growth stage. In most cases, an exact match doesn’t exist. 

Keep in mind: the goal of peer group selection isn’t to find perfect peers. What’s more important is selecting peer companies with relevant characteristics. The best peer group includes companies with similar risk profiles and performance drivers. 

In some situations, you may need to include companies from different sectors that share key financial or operational features. This can be helpful when true peers aren’t available, but it requires extra care to ensure the comparison still makes sense.

Comprehensive Peer Selection Criteria

Choosing the right peer group starts with a structured approach. Strong benchmarking depends on evaluating companies that are similar in two key areas: 

• Business characteristics that shape how a company operates.
• Financial characteristics to find companies with similar economic profiles.

These elements help ensure that companies used for benchmarking face similar market conditions and operational challenges.

For example, a retail company with operations in a single country may face different cost structures, logistics, and consumer behaviors than a global retailer with hundreds of locations, even if both operate in the same industry.

Business Characteristics vs. Financial Characteristics

These characteristics help analysts understand a company’s financial health, level of risk, and stage of maturity. Two companies might serve similar customers but operate very differently depending on how they manage costs, generate revenue, or fund their operations.

Leverage Financial Benchmarking to Deliver Superior Insights

Effective financial benchmarking provides critical context needed to truly understand a company’s performance. By comparing metrics to industry standards and similar companies, you can better identify performance strengths. Comparative data, like multiples and growth assumptions, ensure your valuation models reflect market realities and relative performance.

By applying both industry-wide and targeted benchmarking approaches, you can develop a multidimensional valuation thesis that resonates with clients and investors. Exceptional benchmarking skills can set your analysis apart and strengthen your recommendations.

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Additional Resources

How to Choose Comparable Companies

Comparable Company Analysis Template

IBISWorld Fundamentals for Industry Analysis and Benchmarking

See all Valuation resources