Learning objectives
By the end you can:
- Run all five comparisons on any ratio: 5–10 year time series (level, trend, volatility, inflections), cross-section vs 3–5 true peers, common-size statements (vertical and horizontal), the cost-of-capital hurdle, and sector-adjusted norms. State what each one can see that the others cannot.
- Pick true peers by business model, not sector label: apply the five peer tests, defend every inclusion and exclusion, and know what to do when fewer than three true peers exist.
- Build complete vertical and horizontal common-size statements from raw filings for an Indian (Schedule III, by-nature) and a US (by-function) reporter, and map the two formats onto each other before comparing a single line.
- Normalize before comparing: strip one-offs symmetrically, align lease models (ASC 842 vs IFRS 16/Ind AS 116), R&D treatment, depreciation lives, and LIFO vs FIFO, calendarize mismatched fiscal years, and choose consolidated vs standalone deliberately. Log every adjustment so the work is auditable.
- Rebuild segment economics from the segment note (Ind AS 108 / IFRS 8 / ASC 280): segment margins and segment returns on capital, inter-segment eliminations and unallocated items handled explicitly, and demonstrate numerically how a consolidated average can move against every segment (mix shift).
- Judge rank against the hurdle separately: explain why being best-in-class proves nothing about value creation, and run the ~12% post-tax (India) / ~8–9% (US) placeholder test on any peer set.
- Produce a full benchmarking study to the standard of the graded-workup gate: one company vs 3 peers on ~15 normalized ratios, with a conclusion-first written reading that ends in one variant question.
Prerequisites & connections
Builds on. M1.02–M1.04, so you can read every line the comparisons use. Then M1.06–M1.09 (the policy notes on leases, R&D, depreciation, inventory methods and consolidation are exactly where comparability breaks) and M1.10 (MD&A and non-GAAP policing: management's own "adjusted" numbers are one-sided normalizations). And the ratio layer: M2.01 (margins and DuPont, the rows of your benchmark table), M2.02 (liquidity/solvency/efficiency rows, EV mechanics, and the "what good looks like" sector tables systematized below), M2.03 (clean NOPAT/ROIC and the hurdle convention reused below), M2.04 (CFO/EBITDA, FCF/PAT, the cash-quality rows).
Feeds forward. M2.06–M2.08: every shenanigan detector is a benchmark that failed, whether DSO against its own history and peers, capex against depreciation, or CFO against NI. Then M3.06 (choosing and adjusting comps for relative valuation is peer selection with prices attached) and M3.03–M3.05 (the hurdle placeholder becomes a real WACC; sector norms become fade assumptions). Further out: M4 (moat claims are tested as ROIC persistence vs peers), M5 (each sector playbook is a pre-built benchmark sheet: the right ratios, the right norms) and M8 (the teardown's question 7, "the economics", is executed as the protocol below, at speed).
A ratio is a word, not a sentence. It acquires meaning only in comparison against history, peers, structure, the hurdle, and the sector, and only honest, normalized comparisons produce true sentences.
4.0 The founding problem: a number with nowhere to stand
Your doctor calls: "Your haemoglobin is 11.2." Is that bad? You have no idea, and neither does the number. The lab report answers by surrounding it: the reference range for your age and sex (a sector norm), your last five readings (a time series), the related markers on the same page (a common-sized panel), the level below which treatment starts (a hurdle). The number was never the information. The comparisons were.
Now: "Asian Paints' operating margin is 18%." Good against what? The candidates are its own ten-year band of 15–21%, Berger's 16%, the 8% a cement company would kill for, the 30% a software company would apologize for, and a hurdle that asks whether 18% on this capital base clears the cost of that capital. Every one of those comparisons returns a different piece of the answer, and no subset substitutes for the rest. That is the discipline, and it has exactly five moves: