Introduction to the Price-to-Sales (P/S) Ratio
The Price-to-Sales (P/S) ratio is a crucial financial metric for institutional investors and analysts seeking to evaluate companies based on their sales performance and market valuation. This ratio compares a company’s stock price with its revenues, providing insight into the value investors assign per dollar of sales.
Understanding P/S Ratio Significance:
The importance of the P/S ratio lies in its ability to reveal how much investors are prepared to pay for each dollar of a company’s revenue or sales. This valuation tool plays an essential role in investment analysis and decision-making by offering a quick comparison between companies within the same sector, enabling investors to assess whether a stock appears undervalued or overvalued based on its P/S ratio.
Calculating the Price-to-Sales (P/S) Ratio:
To calculate the P/S ratio, divide the company’s current stock price by its sales per share, which can be derived from dividing total sales by the number of outstanding shares. The P/S ratio is often calculated using trailing 12 months (TTM) or fiscal year sales, offering valuable insights into a company’s recent financial performance.
Interpreting the Price-to-Sales (P/S) Ratio:
Low ratios might indicate an undervalued stock, whereas high ratios suggest overvaluation compared to industry standards and peers. However, it is essential to remember that P/S ratio does not consider a company’s earnings or profitability; other factors like balance sheet status and industry differences should be taken into account as well.
Incorporating Price-to-Sales (P/S) Ratio in Investment Strategy:
Institutional investors utilize the P/S ratio to compare companies within their portfolio or sector, helping them make informed investment decisions. By evaluating a company’s historical P/S ratios and comparing them with its peers and industry standards, investors can identify potential undervalued or overvalued stocks, adjusting their portfolios accordingly to maximize returns.
Stay tuned for more sections on calculating the P/S ratio in detail, interpreting it further, and understanding its limitations as well as advantages.
Calculating the Price-to-Sales (P/S) Ratio
The price-to-sales (P/S) ratio serves as an essential financial metric that investors and analysts rely on for evaluating a company’s stock value relative to its sales. The P/S ratio calculates how much the market is willing to pay for each dollar of sales generated by the company, providing insights into undervalued or overvalued stocks within a given sector.
To comprehend the significance of the P/S ratio in finance and investment analysis, it’s crucial first to learn how to calculate this ratio. The calculation process can be carried out using either trailing 12 months (TTM) sales or current fiscal year (FY) sales.
Calculating P/S Ratio Using Trailing Twelve Months (TTM) Sales:
To determine the P/S ratio based on TTM sales, first, gather the company’s total revenues for the previous 12 months and calculate its sales per share. Divide the stock price by the sales per share to arrive at the P/S ratio.
For example, assume Acme Co.’s quarterly sales for the past twelve months are as follows:
– FY1-Q1: $100 million
– FY1-Q2: $110 million
– FY1-Q3: $120 million
– FY1-Q4: $125 million
Calculate the total sales for TTM by adding these figures together, which amounts to $455 million. To find the sales per share, divide the total sales by the number of outstanding shares ($455 million / 100 million shares = $4.55). The P/S ratio would then be calculated as the stock price divided by the sales per share: $10 / $4.55 = 2.2.
Calculating P/S Ratio Using Current Fiscal Year (FY) Sales:
To calculate the P/S ratio using current fiscal year sales, determine the company’s projected sales for the ongoing fiscal year and find its sales per share. Divide the stock price by the sales per share to obtain the ratio.
For instance, if Acme Co.’s sales for FY2 are expected to be $520 million with 100 million outstanding shares and a current stock price of $10, the sales per share would be $5.20, resulting in a P/S ratio of 1.92 ($10 / $5.20).
Using this information, investors can compare companies within the same sector to identify potential bargains or overvaluations. A lower P/S ratio may indicate an undervalued stock, while a higher-than-average P/S ratio could suggest an overvalued stock. However, it is essential to recognize that the P/S ratio’s significance lies in its relevance within the context of the industry and individual company being analyzed, as it does not account for factors such as profitability or debt loads.
In conclusion, understanding how to calculate and interpret the price-to-sales (P/S) ratio is crucial for investors seeking insight into a company’s stock value relative to its sales. With a clear grasp of this powerful financial metric, they can make informed decisions about potential investment opportunities within their chosen sectors.
Interpreting the Price-to-Sales (P/S) Ratio
The price-to-sales (P/S) ratio, also known as a sales multiple or revenue multiple, serves as an essential valuation tool for institutional investors and analysts. It measures the market value investors place on each dollar of a company’s revenues or sales. To calculate this metric, one divides the current stock price by the underlying company’s sales per share. A low P/S ratio may indicate that a stock is undervalued, while an unusually high P/S ratio might suggest overvaluation.
The P/S ratio can be calculated using either trailing twelve months (TTM) or current fiscal year sales. For instance, if a company’s sales for the past 12 months totaled $500 million and its market capitalization was $3 billion with 60 million shares outstanding, the P/S ratio would be calculated as follows: Sales per share = ($500 million) / 60 million = $8.33, and P/S ratio = $100 / $8.33 = 12.03.
When analyzing companies within the same sector, the P/S ratio provides valuable insights. A lower P/S ratio compared to peers could signify that a specific stock is undervalued. However, it’s important to remember that the P/S ratio doesn’t factor in earnings or profitability; instead, it focuses only on sales. As such, interpreting this ratio requires context and understanding of the industry landscape.
Moreover, using the P/S ratio for cross-industry comparisons can prove challenging, as companies in various sectors may have varying capabilities to convert sales into earnings. For example, comparing a technology company with significant profit margins to a retailer with thin margins could lead to misleading conclusions. Additionally, the P/S ratio doesn’t take debt into account – a factor that investors might consider when evaluating a potential investment opportunity.
In contrast, the enterprise value-to-sales (EV/Sales) ratio, which uses enterprise value and not market capitalization like the P/S ratio, offers advantages in addressing some of these limitations. By factoring in debt loads and cash positions, the EV/Sales ratio provides a more comprehensive evaluation. However, it requires additional steps and might not be as readily available as the P/S ratio.
Understanding how to interpret the P/S ratio is crucial for institutional investors and analysts seeking to make informed investment decisions based on accurate valuations. By considering this metric in context with other financial metrics and industry insights, investors can better assess a company’s worth and potential future growth prospects.
Comparing Companies Using the Price-to-Sales (P/S) Ratio
Price-to-Sales (P/S) ratio is a valuable tool for investors and analysts when assessing the value of a company in comparison to others within the same industry. By comparing companies using their P/S ratios, we can determine if one stock may be undervalued or overvalued compared to its peers. However, it’s important to recognize that the P/S ratio alone does not provide a complete picture of a company’s financial situation.
Firstly, the P/S ratio only compares sales and not earnings or profits. In industries where revenues grow significantly faster than earnings, companies might have high sales growth but still be unprofitable. A comparison based on revenue multiples might lead to inaccurate conclusions regarding a company’s true value. To address this limitation, it’s essential to consider other financial metrics, such as the price-to-earnings ratio and operating margins, when evaluating companies.
Secondly, comparing P/S ratios across different industries can be challenging due to significant variations in sales conversion rates, profit margins, and capital intensity. For instance, a tech company might generate more revenue with fewer assets compared to an industrial firm. In such cases, the price-to-sales ratio alone may not provide accurate comparisons between companies operating in distinct sectors.
The Price-to-Sales (P/S) ratio’s utility lies primarily in comparing companies within the same sector and identifying potential mispricings in the market. To effectively use this tool, it is crucial to analyze industry benchmarks, trends, and average P/S ratios to identify potential investment opportunities or value discrepancies.
For example, consider two companies – Acme Inc. and XYZ Corp. Both belong to the same sector and have similar market capitalizations. By comparing their P/S ratios, we can assess whether one stock is undervalued relative to the other. If Acme’s P/S ratio is lower than XYZ’s despite comparable revenues or even higher sales growth, it may be an indicator of potential value for investors.
However, it’s essential to remember that a low price-to-sales ratio could also indicate underlying issues such as poor profitability, high debt levels, or declining industries. A thorough analysis incorporating additional financial metrics and industry factors is necessary before making investment decisions based on P/S ratios alone.
To further enhance the accuracy of your valuation, you can consider using a combination of ratios like Price-to-Earnings (P/E), Price-to-Book (P/B), and EV/EBITDA to gain a more comprehensive understanding of a company’s financial situation before making investment decisions.
In conclusion, the Price-to-Sales ratio plays an essential role in assessing the value of a company, particularly when comparing it to its industry peers. While it has its limitations, understanding these and combining it with other financial metrics will provide investors with a more well-rounded perspective on potential investment opportunities.
The Relationship Between Price-to-Sales (P/S) Ratio and Earnings
One significant limitation of using the price-to-sales (P/S) ratio as an investment tool is that it doesn’t account for earnings or profitability. The P/S ratio solely focuses on revenues and sales without considering whether a company generates profits, making it essential to understand its implications.
Firstly, it’s crucial to acknowledge that a high P/S ratio does not necessarily mean the stock is overvalued. For instance, some industries have higher revenue multiples than others due to their nature. Tech companies, for example, are often valued at higher P/S ratios because of their potential for growth and innovation. In contrast, mature industries like utilities or consumer staples typically have lower P/S ratios.
However, a high P/S ratio can be concerning when compared to other companies in the same sector with more reasonable valuations. This discrepancy might suggest that investors are overpaying for the stock based on current sales alone. In such cases, it’s essential to consider other financial metrics like earnings per share (EPS) and return on equity (ROE) to form a comprehensive evaluation of the company’s value.
An alternative method to address this limitation is by examining the price-to-earnings (P/E) ratio. The P/E ratio compares a stock’s market value to its earnings per share, which can help determine whether the stock is undervalued or overvalued based on earnings rather than sales. A low P/E ratio implies that investors are paying less for each dollar of earnings compared to other companies in the sector.
In summary, the price-to-sales (P/S) ratio provides valuable insights when comparing companies within the same sector, but it does not account for profitability or earnings potential. To gain a more complete understanding of a company’s valuation, it’s essential to combine the P/S ratio with other financial metrics such as earnings per share (EPS) and return on equity (ROE). By doing so, investors can make informed decisions based on both sales and earnings, ensuring that they have a well-rounded view of a company’s worth.
Price-to-Sales (P/S) Ratio vs. Enterprise Value-to-Sales (EV/Sales)
The Price-to-Sales (P/S) ratio is a widely used valuation metric that compares a company’s market value to its sales or revenues. It allows investors and analysts to gauge a stock’s worth based on its earning capacity, making it an essential tool for understanding a company’s valuation. However, P/S ratios have their limitations, such as the absence of consideration of profitability or debt. To address these shortcomings, the Enterprise Value-to-Sales (EV/Sales) ratio emerged as an alternative method to evaluate companies and compare them against their peers more effectively. In this section, we will delve into the differences, advantages, and reasons why investors might utilize both P/S and EV/Sales ratios in their investment strategies.
Price-to-Sales Ratio: An Overview
The Price-to-Sales (P/S) ratio is a fundamental financial ratio that measures a company’s value by comparing its market capitalization to its sales or revenues. It is calculated as the stock price divided by the sales per share, with lower ratios indicating an undervalued stock and higher ones suggesting overvaluation. The P/S ratio is particularly useful for investors when evaluating companies within the same industry sector, enabling them to make informed decisions about potential investments. One limitation of the P/S ratio is that it does not account for a company’s profitability or debt load, making it less effective in comparing companies across different industries.
Enterprise Value-to-Sales (EV/Sales) Ratio: An Introduction
The Enterprise Value-to-Sales (EV/Sales) ratio is another valuation metric used to assess a company’s worth based on its sales or revenues. However, it differs from the P/S ratio in that it calculates a company’s enterprise value instead of market capitalization. Enterprise value represents a company’s total value, including debt, preferred shares, and cash. EV/Sales ratios are typically lower than P/S ratios because they account for a company’s debt load, providing a more comprehensive analysis of a company’s financial situation when comparing it to other companies within its industry.
Comparing the P/S and EV/Sales Ratios: Differences and Advantages
The primary difference between P/S and EV/Sales ratios lies in their calculation methods. While P/S ratios focus on a company’s market value, EV/Sales ratios encompass a broader scope of a company’s financial situation by considering its debt load, preferred shares, and cash. The following are some advantages of using both metrics:
1. Industry Comparison: Investors can use P/S ratios to compare companies within the same sector but may find it challenging to do so when comparing those with vastly different industry backgrounds. In such cases, EV/Sales ratios are more suitable for assessing a company’s financial position relative to its peers across various industries.
2. Debt Consideration: Companies with significant debt loads will have higher P/S ratios due to the lack of consideration of their debt in the calculation. By incorporating debt into the analysis through EV/Sales ratios, investors can gain a more accurate understanding of a company’s worth and its potential profitability.
3. Valuation Perspective: Both P/S and EV/Sales ratios offer unique perspectives when evaluating companies. The former focuses on the stock’s price in relation to sales, while the latter assesses a company’s enterprise value relative to its sales. A combination of both ratios can provide investors with a more holistic understanding of a company’s worth.
In conclusion, the Price-to-Sales (P/S) and Enterprise Value-to-Sales (EV/Sales) ratios serve essential roles in the financial analysis and investment world. While P/S ratios offer insights into a company’s earning capacity relative to its market value, EV/Sales ratios provide a more comprehensive assessment by factoring in debt and preferred shares. By utilizing both metrics, investors can make informed decisions about potential investments and gain a better understanding of a company’s financial health in relation to its industry peers.
Advantages and Limitations of Using Price-to-Sales (P/S) Ratio
The price-to-sales (P/S) ratio is a widely used valuation tool for institutional investors and analysts due to its ability to offer insight into how the market prices each dollar of a company’s sales. Calculated by dividing a company’s stock price by its sales per share, the P/S ratio can be an effective means to compare companies within the same sector and evaluate potential undervaluation or overvaluation. However, it does come with certain limitations.
Advantages of Using P/S Ratio:
1. Offers insight into market valuation: The P/S ratio reveals how investors value a company based on its revenue generation capabilities.
2. Comparative advantage: It can be employed to compare the valuations of companies within the same sector and assess their relative merits.
3. Identifies potential undervaluation or overvaluation: A low P/S ratio may suggest an undervalued stock, while a high ratio could imply overvaluation.
4. Easy calculation: Calculating the P/S ratio is relatively straightforward using either market capitalization and total sales over a designated period (trailing 12 months or current fiscal year) or on a per-share basis by dividing the stock price by sales per share.
Limitations of Using P/S Ratio:
1. Ignores earnings: One significant limitation is that it does not factor in earnings or profitability. As such, it may not provide a comprehensive understanding of a company’s true value.
2. Industry differences: Comparing companies across different industries can present challenges due to varying revenue conversion capabilities and profit margins. For example, video game developers often have lower P/S ratios compared to grocery retailers despite generating substantial sales.
3. Debt load omission: The P/S ratio fails to account for a company’s debt load or the status of its balance sheet, making it necessary to consider other financial metrics such as the enterprise value-to-sales (EV/Sales) ratio.
4. Market sentiment impact: Market sentiment and investor psychology can influence a stock’s P/S ratio, potentially leading to misvaluation or overreaction.
5. Short-term focus: The P/S ratio relies on sales data for the most recent 12 months (trailing 12 months or TTM) or the current fiscal year, making it a short-term metric that may not capture long-term growth prospects effectively.
Investors and analysts must consider these advantages and limitations when employing the P/S ratio as a valuation tool. By understanding its strengths and weaknesses, they can make more informed investment decisions based on a comprehensive analysis of various financial metrics and company fundamentals.
Real-life Examples of Price-to-Sales (P/S) Ratio Application
The price-to-sales (P/S) ratio is a powerful valuation tool for investors and analysts, enabling a clear understanding of how much investors are willing to pay per dollar of sales for a specific stock. In this section, we explore real-life examples that demonstrate the application and interpretation of the P/S ratio in practice.
Firstly, let’s consider Acme Co., whose quarterly sales data is presented in the table below:
| FY1-Q1 | FY1-Q2 | FY1-Q3 | FY1-Q4 | FY2-Q1 | FY2-Q2 | FY2-Q3 | FY2-Q4 |
|—|—|—|—|—|—|—|—|—|
| $100 m | $110 m | $120 m | $125 m | $130 m | $135 m | $130 m | $125 m |
Assuming a current stock price of $10 per share and 100 million outstanding shares, we can calculate Acme’s trailing-12-month (TTM) P/S ratio as follows:
Sales for the past 12 months = $455 million
Sales per share (TTM) = $4.55 ($455 million ÷ 100 million shares outstanding)
P/S ratio = $10 ÷ $4.55 = 2.2
Comparing Acme’s P/S ratio with that of its sector peers, which trade at an average (TTM) P/S ratio of 1.5, suggests a premium valuation for the company. One reason for this could be the projected revenue growth in the current fiscal year ($520 million versus $455 million), which may outpace that of its competitors.
Another example is Apple Inc., whose fiscal 2020 revenues totaled $274.5 billion, and with 16.53 billion outstanding shares and a stock price of $145, we have:
Sales per share = $16.60 ($274.5 billion ÷ 16.53 billion)
P/S ratio = $145 ÷ $16.60 = 8.73
Comparing Apple’s P/S ratio to those of its tech industry peers such as Google ($6.29) and Microsoft ($10.87) indicates that Apple may potentially be undervalued based on this metric. However, it is essential to consider additional factors like earnings, profits, and the companies’ balance sheets before making a definitive investment decision.
In summary, real-life examples of P/S ratio application can provide valuable insights when evaluating individual stocks or comparing companies within the same sector. By analyzing historical sales data and current stock prices, investors and analysts can make informed decisions regarding potential undervalued or overvalued stocks.
Incorporating Price-to-Sales (P/S) Ratio into a Valuation Model
One effective method for assessing a company’s valuation using the P/S ratio is to combine it with other financial metrics in a comprehensive evaluation model. The price-to-earnings (P/E) ratio, price-to-book (P/B), and debt-to-equity ratios can all be incorporated alongside the P/S ratio to provide a more well-rounded perspective on a company’s worth.
First, it is essential to understand the relationship between P/E and P/S ratios. While both ratios assess valuation, they differ in their focus: P/E evaluates earnings per share (EPS), whereas P/S analyzes sales per share (SPS). It’s crucial to know that EPS is derived from sales: Sales = Cost of goods sold + Operating expenses + Depreciation + Amortization + Interest expense + Taxes – Pre-tax income = Net Income / Number of outstanding shares.
When building a financial model using the P/S ratio, start by calculating the P/S ratio based on trailing 12 months (TTM) sales or current fiscal year sales (FY). Next, determine the company’s P/E ratio by dividing its stock price by its EPS.
For instance, assume XYZ Corporation has reported a trailing 12-month sales figure of $20 billion and a market capitalization of $50 billion. The P/S ratio would be calculated as follows: $50,000 million (market cap) / $20,000 million (sales) = 2.5.
Simultaneously, if the company’s EPS for the trailing 12 months is $4 per share, then its P/E ratio would be calculated as: $50 / $4 = 12.5.
By examining these ratios side by side, investors can identify how much they are paying for each dollar of sales and earnings. In this example, XYZ Corporation is being valued at $2.5 per dollar of sales and $12.5 per dollar of earnings.
The next step would involve calculating additional financial ratios like the price-to-book (P/B) and debt-to-equity ratio to provide a more comprehensive evaluation of the company’s worth. The P/B ratio assesses a stock’s market value relative to its book value, while the debt-to-equity ratio evaluates the level of debt compared to equity.
To calculate the P/B ratio, investors would divide the current market capitalization by the company’s total assets minus intangible assets and liabilities: $50 billion (market cap) / ($20 billion – $1 billion) = 2.5. The debt-to-equity ratio is determined by dividing a company’s total liabilities by its total equity: $3 billion (total liabilities) / $7 billion (total equity) = 0.43.
Incorporating these ratios into the valuation model can help investors gain a deeper understanding of a company’s value and assess potential opportunities or risks associated with the investment. The P/S ratio, P/E ratio, P/B ratio, and debt-to-equity ratio all provide unique insights that should not be overlooked when making informed investment decisions.
Price-to-Sales (P/S) Ratio: Future Trends and Considerations
The Price-to-Sales (P/S) ratio has been an essential tool for institutional investors and financial analysts for assessing a company’s valuation. Its unique perspective on a stock’s worth, which compares the market value per share to sales per share, has been invaluable in various contexts. However, as financial markets continue evolving, it is essential to explore future trends and considerations surrounding the P/S ratio for investors.
Firstly, the increasing popularity of technology stocks with high revenue growth but no immediate earnings might challenge conventional wisdom regarding the importance of earnings in valuation models. In these instances, focusing solely on sales rather than profits can offer valuable insights.
Second, the rise of Artificial Intelligence (AI) and Machine Learning (ML) technologies may influence how P/S ratios are calculated and interpreted. For companies with significant AI or ML investments, revenue recognition rules will need to be clarified, making it crucial for investors to adapt their evaluation approaches accordingly.
Additionally, the increasing availability of alternative valuation metrics like the Enterprise Value-to-Sales (EV/Sales) ratio could lead to a shift in analysts’ preference towards these ratios as they provide a more comprehensive evaluation perspective by incorporating debt and cash holdings. The choice between P/S and EV/Sales ratios may depend on specific industry sectors, investment strategies, or an investor’s risk tolerance.
Moreover, advancements in cloud computing and the growing trend towards remote work are creating new revenue streams for businesses and potentially altering traditional valuation models. Companies that have successfully pivoted to these trends may exhibit unique P/S ratios that investors must consider carefully.
Lastly, changes in market sentiment and macroeconomic factors can significantly impact P/S ratio interpretations. For instance, a bearish outlook on the economy could cause investors to reassess their valuation strategies, potentially leading to altered P/S ratios for various sectors.
In conclusion, the Price-to-Sales (P/S) ratio remains a valuable tool for institutional investors in assessing a company’s worth. However, its continued relevance and usefulness depend on the ability of investors to adapt to emerging trends and considerations, including the impact of technology on revenue recognition, the rise of alternative valuation ratios, new revenue streams, and changing market sentiment. By staying informed and adaptive, institutional investors can maximize the value they derive from the P/S ratio in their investment decision-making processes.
FAQ: Frequently Asked Questions About Price-to-Sales (P/S) Ratio
The price-to-sales (P/S) ratio is a crucial investment tool used by institutional investors and analysts for company evaluation and valuation. This FAQ section offers answers to frequently asked questions about the P/S ratio, its calculation methods, interpretations, and applications.
What is the Price-to-Sales (P/S) Ratio?
The price-to-sales (P/S) ratio compares a company’s stock price with its revenues or sales per share over a given period. It is an indicator of how much investors are willing to pay for each dollar of a company’s sales.
How Is the Price-to-Sales (P/S) Ratio Calculated?
The P/S ratio can be calculated using different methods: dividing a company’s market capitalization by its total sales over a designated period (trailing 12 months or current fiscal year) or calculating it on a per-share basis by dividing the stock price by sales per share.
What Does a Low Price-to-Sales (P/S) Ratio Mean?
A low P/S ratio may suggest that the stock is undervalued, as investors are paying less for each dollar of sales than they might typically be willing to pay. On the other hand, a high P/S ratio could indicate overvaluation, with investors paying more per dollar of sales than average.
What Industries Are Suitable for Price-to-Sales (P/S) Ratio Analysis?
The P/S ratio is most effective when comparing companies within the same sector or industry as it allows for fair comparisons. For instance, evaluating tech companies using a P/S ratio versus retail businesses would not yield accurate results due to inherent differences in industry dynamics and business models.
Why Doesn’t the Price-to-Sales (P/S) Ratio Consider Earnings?
The primary drawback of the P/S ratio is that it doesn’t take into account a company’s earnings or profitability. As a result, some investors prefer alternative valuation methods such as price-to-earnings (P/E) ratios for a more comprehensive analysis.
What Are Alternatives to the Price-to-Sales (P/S) Ratio?
Investors and analysts may also consider other valuation metrics like the enterprise value-to-sales (EV/Sales) ratio, which accounts for debt loads and provides a more comprehensive assessment of a company’s financial standing. However, calculating the EV/Sales ratio involves additional steps and may not always be readily available.
What Are the Advantages and Disadvantages of Using Price-to-Sales (P/S) Ratios?
Advantages: Provides insights into a company’s sales growth potential, easy to calculate and compare against industry peers. Disadvantages: Does not account for profitability or earnings, may not be suitable for cross-industry comparisons.
Can Price-to-Sales (P/S) Ratios Be Used in Financial Models?
Yes, the P/S ratio can be incorporated into financial models to evaluate a company’s valuation based on sales growth and market sentiment, providing a more comprehensive analysis when combined with other financial metrics.
In conclusion, the price-to-sales (P/S) ratio is an essential investment tool used by institutional investors and analysts for valuing companies based on their sales potential. By understanding its calculation methods, interpretations, applications, advantages, and limitations, investors can make informed decisions when comparing companies within the same sector and industry.