Peer group
The set of comparable companies a firm is benchmarked against, ideally sharing its industry and business model. Chosen badly, it makes every ratio comparison misleading.
Where you will meet it
Peer group appears in 7 learning outcomes on the CFA syllabus. A few of them:
- Choose comparable peers and tell trailing multiples apart from forward ones
“A good peer group shares the target's business mix, growth, risk, size and accounting basis, and industry classification is a starting point rather than an answer.”
- Explain where ratio analysis falls short and how segment data can be used
“Diversified companies have no clean peer group at the consolidated level, and a single set of consolidated ratios can average two businesses with opposite characteristics into a figure describing neither.”
- Contrast relative with absolute valuation models and give examples of each kind
“A relative model can show a share is cheap against its peers while the whole peer group is overpriced, so its answer is only relative to the benchmark.”
- Set out the ways an equity manager can divide up the universe of investable shares
“The chosen segmentation shapes the benchmark, peer group and risk controls.”
Practise it
Practise peer group until it is automatic: questions that explain every wrong option.
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