Chapter 4 Analysis of Financial Statements 1054-11 BENCHMARKING
Ratio analysis involves comparisons with industry average! gures, but Allied and
many other! rms also compare themselves with the top! rms in their industry.
This is called benchmarking, and the companies used for the comparison are
called benchmark companies. Table 4-4 provides data for Allied and its seven
benchmarks. The companies are ranked by ROE, and the other ratios used in a
DuPont analysis are shown in the table as well. The ROE makes it easy for Allied’s
managers to see where the! rm stands relative to top food processors, and the
other data give management an idea of why Allied’s ROE ranking compares unfa-
vorably with most of the other benchmark companies.
Perhaps the most interesting feature of Table 4-4 is the wide range of ROEs.
This range is caused primarily by variations in pro! t margins and equity multipli-
ers. These companies also have the most widely recognized brands—their excel-
lent marketing programs enabled them to charge relatively high prices, which
boosted their pro! t margins and thus their ROEs. Their high and stable pro! ts
enable them to use a great deal of debt, which boosted their equity multipliers and
provided another boost to their ROEs.
Note too that the averages for Allied and its benchmark companies differ sig-
ni! cantly from the averages for its industry. The benchmarks are all very large
companies, while there are many small food processing companies whose data are
included in the industry averages. Since Allied is a relatively large company, its
chief! nancial of! cer (CFO) believes it makes more sense to compare Allied to
other large companies than to industry averages.4-11 Benchmarking
The process of comparing
a particular company with
a set of benchmark
companies.Benchmarking
The process of comparing
a particular company with
a set of benchmark
companies.SELF^ TEST Why are comparative ratio analyses useful?Tabl e 4 - 4 Benchmark Companies Ranked by ROEROE!Profit
Margin " Turnover "Equity
Multiplier
Campbell Soup 59.4% 10.3% 1.1 5.24
H.J. Heinz 39.3 8.8 0.9 4.96
Hershey Foods 33.6 4.3 1.2 6.51
Sara Lee 21.9 4.8 1.1 4.15
Dean Foods 17.4 1.6 1.6 6.80
Flowers Foods 15.5 4.8 2.2 1.47
Allied Foods 12.5 3.9 1.5 2.13
Del Monte Foods 8.0 3.2 0.7 3.57
Averages 25.9% 5.2% 1.3 4.35
Averages for entire food industry 26.8% 10.5% 1.1 2.32
Note: Rounding causes some variations in the numbers.
Source: Data on the benchmark companies were obtained from http://moneycentral.msn.com, February 11,- Similar data can be obtained from Yahoo, Google, and a number of other online and print sources.