What is Comparable Company Analysis: Definition & Meaning Explained

Annual Net Profit Margin

A Net Profit Margin is the ratio of a company’s net profits to revenues. The formula to calculate Net Profit Margin is:

Net Profit Margin = Net Profit* / Revenue * 100

*Net profit = Revenue - Cost of goods - Operating Cost - Other Expenses - Interest - Taxes

Net Profit Margin is expressed as a percentage, which means that you can compare the financial health of multiple companies.

A company can use its Net Profit Margin to understand whether its strategies and business models are effective.

Liquidity

Liquidity determines the ease with which an asset can be sold in exchange for cash at or around its current market price. Liquidity is also used in the context of businessess, where the term indicates the company’s ability to secure loans to fulfil short term debt obligations or to sell its assets and procure cash in exchange.

Free Cash Flow

In accounting and earnings reports, free cash flow refers to the amount of money a company has after paying its maintenance expenses, salaries, utility expenses, and other operating expenses as well as capital expenditures.

The formula to calculate free cash flow: Operating Cash Flow − Capital Expenditures

Free cash flow is an important metric, especially for investors because it is a direct indicator of the financial competence of a company. For example, the amount of FCF a company has can decide whether it has enough cash to offer dividends, expand business, buy back shares, etc.

Blue Chip Stocks

Blue chip stocks are shares of iconic companies in India that have been leaders of their respective industries for years, if not decades, and have a stellar yet consistent business track record. Example of blue chip stocks in India are: HDFC Bank, TCS, Reliance Industries, Hindustan Unilever, Infosys etc.

At The Money

At The Money is a scenario in which the strike price of an options contract is the same as the market price of its underlying security.

Exercising an option At The Money can lead to a loss as the premium paid for the contract won’t be recovered.

That said, At The Money is known to be a positive indicator as it indicates the option may soon have intrinsic value.

Book To Bill Ratio

Book to Bill ratio is the value you get by dividing the total worth of new orders received by the total worth of orders sold. The formula to calculate Book to Bill ratio is:

Book to Bill ratio: Total worth of new orders received / Total worth of orders billed

Book to Bill ratio helps companies understand the demand and supply for their goods or services. A Book to Bill ratio of more than 1 means that there’s more demand and less supply.

Whereas, a Book to Bill ratio of less than 1 means that there’s less demand and more supply. Using these indicators, the company can work on increasing or limiting production.

*All securities mentioned on this website are exemplary and not recommendatory.

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Comparable Company Analysis