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In cases, what are some standard benchmarks to know and then to compare the client with?

Anonymous A asked on Oct 21, 2018

For example:

Operating Profit Margin (is below 10% bad?)

Fixed Cost proportion

Variable Cost etc

I know it "depends" on different industries and of course if its a start up etc - but generally speaking what do companies aim for?

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Egor
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replied on Oct 22, 2018
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Hi A,

The best course of actions I suggest is the following:

  1. Benchmark a client across industry competitors (make sure that companies have the same business model)
  2. Find the historical standard deviation of the margins/costs to understand, what could happen in the future and extrapolate it
  3. Understand the drivers of margins (e.g. in metals and mining industry large proportion of EBITDA margins for companies is prices on metals in international markets. If they are high, then margins may be up to 3-5% higher.

Furthermore, if you want to compare companies the most universal metric is EBITDA margin for all industries. Specific metrics do exist, but you can use EBITDA margin as the most widespread and helpful.

All the best,

Egor

Guennael replied on Oct 22, 2018
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I honestly couldn't tell you - industries, even regions or time periods, will have such a big influence that a standard answer cannot begin to be useful. One of my previous employers was in the utility business, which you'd normally assume would need a mid-to-high single digit return. Yet a sister company operated on the cost plus model, and the local legislature allowed a ~10% profit margin. For my own employer however, a bankruptcy even meant we had a 27% WACC - so any investment needed to return at least this much. Same industry, same geography and time period (and inflation / economic environment), 3 different answers.

Francesco replied on Oct 23, 2018
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Hi Anonymous,

as commented by others, there is no universal metric you can use on this as there are too many variables that could have an influence on a key metric (industry, cycle, geography, stage of company etc..).

The best thing you can do if you get this question in a case is to benchmark with competitors - this should give you an idea on the positioning of the client.

Best,

Francesco

Vlad replied on Oct 22, 2018
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Hi,

Don't worry about the actual numbers. The interviewer would share the benchmarks if you ask for them (and if he has them)

Best

Elias
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replied on Oct 22, 2018
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Agree with Guennael,

there is absolutely no way of telling.

There are some very, very general guidelines, like

  • inverse relationship between turnover velocity and return on sales
  • relationship between investment (capex) intensity and EBITDA margins

But I bet you can find counter-examples for each of them...

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