By Ariel Markelevich and Alex Rapp
Ariel Markelevich is Chief Product Development Officer for Calcbench, based in Cambridge MA, and Associate Professor of Accounting at the Sawyer Business School at Suffolk University in Boston MA. He serves on XBRL US's Communication Steering Committee and on the IMA's XBRL Advisory Committee. Alex Rapp is the President, CTO, and co-founder of Calcbench, which won the first annual XBRL Challenge (created by XBRL US to uncover the best open-source analytical tools that can mine XBRL formatted corporate financial data from the SEC's EDGAR database).
A great company is always pushing to keep ahead of its competition. To aid in this effort, a top-tier finance team should collect and analyze available data, not just to measure how the company is doing in comparison to its peers but also to see what insights can be learned by examining competitors' strong and weak points. Until recently, this kind of data-driven peer benchmarking was a slow, tedious, error-filled process, involving hours wasted digging data points out of SEC filings. For this reason, many finance professionals avoided doing it altogether, but thanks to XBRL, the situation is changing fast.
With an XBRL data analysis platform such as Calcbench's - which, for example, allows easy access to a vast array of public financial information filed by companies of all sizes - digging for data points is now obsolete. This article illustrates the process with a straightforward benchmarking example that once took hours to complete but now takes just minutes, thanks to the XBRL tagging of public financial statements.
Why benchmarking matters
First, here are a few situations in which benchmarking by evaluating XBRL data is so useful:
- Financial planning and analysis. How do you stack up in terms of profitability, leverage, inventory management, cash management, or other metrics? You can identify areas that need more work before you fall too far behind.
- Mergers and acquisitions. How do you analyze an acquisition target beyond just kicking the tires? If your target does not stack up positively within its peer group, it may be a bad fit.
- Risk analysis. Are your major customers or important members of your supply chain in strong financial positions? If not, you could be left with unpaid bills or unfilled orders. It pays to take a closer look.
- Market trends. Revenue, margins, capital investments, debt . are they growing? By how much? Enough to warrant stronger investment? Or is it wiser to keep cash reserves strong for now? Amazingly, many CFOs rely on newspaper articles and other secondary sources for data about their own industry.
- Bonuses and compensation. Is your compensation appropriate? Many companies find it very effective to structure bonuses around performance relative to peers.
How to benchmark
For our simple benchmarking exercise, we will quickly take a look at a few basic metrics that work with the XBRL data, and then do a little more detailed dive into inventory. For this example, Campbell Soup Company (NYSE: CPB) will be the focus.
Step 1: Define your peer group
The choice of peer group is crucial for a meaningful analysis. However, for this simple example, let's take a fairly basic approach to building a peer group. Start with every company that identifies itself in the same SIC group (Food and Kindred Products) as Campbell's, 110 companies in all. Next, filter for size, to hone in on a group that is more similar to CPB. In this case, given that CPB has reported Revenues of $8 billion, the filter is set to companies between $3 billion and $15 billion in Revenues, reducing our group to 19 companies. Further customize the peer group by manually removing a few companies that are not close peers, such as Molson Coors and Pilgrim's Pride. This leaves a peer group of 16 companies). See Fig. 1.
Step 2: Collect and standardize the data
Once the peer group is defined, with one click you can compute from the XBRL data a page full of analytics for the target company, as compared to its peers. To start the analysis, focus on CPB's performance and financial position as compared to the peer group, beginning with an analysis of the Income Statement, then its Balance Sheet, and finally, key financial ratios. A few immediate points to note from the table shown in Fig. 2:
The company ranks near the bottom third for Gross Profit; its R&D cost seems high relative to the peer group (the 80th percentile rank); and its Net Income is low compared to the peer group (ranking near the bottom). Reviewing the balance sheet shows that the company's cash levels are stable and that they compare favorably to the peer group. Note the relatively high level of short-term debt and a large increase in that account. Observe as well a large increase in Inventory (almost 30%), although inventory levels are relatively low compared to the peer group, as shown in Fig. 3.
Other financial ratios show a relatively high P/E ratio, suggestive of favorable prospects seen by stock markets. We also observe a relatively high Debt Ratio, compared to the peer group. See Fig. 4.
Step 3: A deeper analysis of inventory
As additional analysis, examine CPB's inventory. As shown in the following chart, inventory as a percentage of assets is slightly low compared to the peer group. See Fig. 5.
To better understand the aggregated value of inventory, examine CPB's different types of inventory. For more information, go to CPB's inventory footnote (Fig. 6). Notice the increase in the inventory of both raw materials and finished products.
When using Calcbench for this benchmarking exercise, you can also double-click on the inventory amounts and chart the values for those accounts previously reported by the company (Fig. 7).
As the chart reveals, the inventory levels for raw materials were relatively stable until a significant increase in 2013. (It might be interesting to see more details about inventory for the whole peer group.) By adding a few new columns to the benchmark view - Inventory, Inventory Raw Materials, and Inventory Finished Goods - you can quickly chart the percentage of each peer company's inventory being held in raw materials (Fig 8).
Why XBRL data quality matters
The example presented here is simple, but other steps - such as easily and quickly reviewing the components of inventory - are more innovative and are made possible by harnessing the power of XBRL data with the technology developed by Calcbench. It is interesting to note that the way companies tag the data in XBRL may affect the ease of use.
For example, rather than tagging the inventory information in the footnotes as an inventory footnote, CPB chose to tag it as Presentation of Financial Statements. This is not a mistake; it is a choice given to the company to present the information in different ways. A data provider needs to be aware that the filer may place footnote information (e.g., inventory) in various places; hence, it will require additional effort to collect the same information for different companies. Calcbench and the other data providers go through the process of mapping and collecting information that was tagged differently, so the data can be easily consumed by users of financial information.
In addition to variations in location, some of the analysis using XBRL data relies heavily on the quality of the XBRL data and on the quality of the data provider. The data provider should examine the quality of the data received from the SEC, then detect and correct any errors that may have been made by the filers. (More information about the frequency of errors detected and corrected by Calcbench is available in a recent study.)
At Calcbench, we spend a significant amount of time checking and double-checking data quality, to ensure we are not passing quality issues on to our users. We catch and correct numerous errors and inconsistencies in the XBRL source files we process. However, we would prefer to spend our time building new, advanced analysis tools rather than chasing down filing errors. For others using XBRL directly, many of the errors we encounter could be too much to overcome. We believe it will take everyone's hard work to improve the level of XBRL data quality going forward, and we are trying to help that effort by sharing information with filers on our complimentary Filer Portal. If you are a corporate reporting professional, please go to www.calcbench.com/filerportal for more information.
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