How to Choose the Best Financial Statement Benchmarking Data for your Next Valuation
In a valuation, we need to compare the subject company’s financial statements against itself and the industry it operates in. Choosing the best source for benchmarking data to do this depends on the facts and circumstances of the case. On the surface, the data may appear very similar and give similar results but there are key differences that will impact the interpretation, and often the best choice depends on the subject company. While trade associations may offer the best data, they are not available for most industries. Here are the key differences between the benchmarking data ValuSource offers:
Risk Management Association (RMA) data is based on actual company financial statements. This data is not modeled in any way and is updated yearly. The data is collected by banks that receive financial statements for loan applications, and these are provided to RMA. This means that for some industries and size categories, there are a limited number of companies represented, but it also means the data is very current (less than a year old) and reflects events such as COVID. The collection and analysis process is one hundred percent transparent and documented. RMA data is very well respected in the valuation community, having been around since 1916 when a group of bankers wanted to mitigate credit risk through the exchange of company financial information. Having a completely transparent collection and analysis process based on actual company financial data can be an advantage over modeled data. In addition to the data contained in the standard RMA Annual Statement Studies database, the Valuation Edition contains enhanced financial ratios, including national and regional data, the entire distribution curve for every variable, an income statement and balance sheet presented in dollars ($) as well as in percentages (%), and industry growth rates. The enhanced data allows valuators to “rank” a company’s financial statements against RMA data, providing a much more precise picture of how the company is performing.
WHY CONSIDER RMA: If you are looking for transparent data collection and processing, very current data, data based on actual company financial statements, and the ability to “rank” company performance, RMA is worth considering.
- Bizminer (Financial Statement Data)
Bizminer data is made up of numerous sources, including both government and private sources. The data is combined using proprietary and not disclosed algorithms which process the data to produce the final results. The process includes backcasting (past), it’s the opposite of forecasting (future), and uses sophisticated algorithms to compute specific data points. Bizminer was founded in 1990 and over 20 years their analysts worked on identifying different data sources and refining algorithms to create data for 9000 industries, broken down with incredible granularity, including by zip code, county, metro area, and state. One of Bizminer’s strengths is the incredible depth and breadth of its financial data. Bizminer data also have very little missing data because they rely on many data sources and their algorithms can compute and/or interpolate results for missing data. However, because the data is modeled based on these proprietary algorithms and uses multiple sources of data, it’s not possible to know how the resulting data was calculated. Bizminer’s multiple data sources and algorithmic approach is different than RMA and IRS, but the variables produced for financial statement benchmarks are very similar to both of them. Bizminer also includes an industry description and analysis, which is helpful.
WHY CONSIDER BIZMINER: If you want depth and breadth of data based on multiple data sources, Bizminer is definitely worth considering.
- IRS Corporate Ratios
IRS data is gathered from tax returns, form 1120, and is based on statistical analysis and averages. ValuSource then uses the tax return representing an industry or size and calculates the ratios from it. Because the data comes from tax returns, the strength of this data is that it has a very large sample size for every industry. The weakness of this data is that it takes around three years for the data to become available. In recent years, the data has only been available in summary format, so you are limited to data based on the entire industry, without being able to drill down on size. The IRS size data in recent years is based on all industries, which l limits its usefulness. The database comes with over 20 years of IRS data so you can perform multi-year analysis as well as industry trend analysis. An interesting side note is that IRS data is used in most of the other products that combine multiple data sources and use algorithms/modeling to produce their results.
WHY CONSIDER IRS: If you are looking for huge sample sizes, IRS is worth considering.
Similar BUT Different
All three databases, RMA, Bizminer and IRS, produce a very similar set of financial statement ratios typically used to analyze a company. However, each of these databases may be missing some data points based on industry or other slice of data you are looking at, but in general, they all provide a comprehensive financial statement benchmarking dataset.
The other thing to keep in mind for these databases is how specific data points compare to each other. So, for instance a current ratio of 1.2 compared to a current ratio of 1.3 is similar whereas a current ratio of 1.2 compared to 3.5 is not. Most of the time, the differences between the same data point in the various databases is small. That said, there are times when the differences will be significant and it’s up to you as the expert to deal with the differences appropriately. Choosing the best source for benchmarking data is dependent on the specific fact pattern and purpose of the engagement. All three sources are relevant and provide data in a similar format. The choice of which benchmarking data to use, how to use, apply and interpret it, is always left to the judgment of the expert.