Relative market share profit
how it can help you pick successful stocks
Articles
Improve your credit score
HIPS explained
Mortgage fees explained
Sub prime crisis explained
Northern Roack crisis explained
Borrowing for buy to let
Best Buy to Let Mortgages
Northern Rock Nationalisation
Cheap landlords insurance buy to let
High net worth property insurance uk
Buy to let slowdown
Low interest refinance
Updates / News
Get our FREE pack that details the Investment Secrets of professional traders.Just CLICK HERE.
Relative market share profit
Relative market share profit is a little know ratio that offers the investor a comparison of a company's profitability in relation to its market share. A mistake many investors make is to simply compare profits of competitor companies in the same market. This is all very well but the first obvious problem with this approach is that it doesn't take into account a companies market share. The relative market share profit calculation is computed by taking the companies market share (as a percentage) and multiplying it by its profits.
When this tool is used over time (using trend analysis) it gives the investor an insight into the relative profitability of a company as it's market share has either increased or decreased. If the company in question has changed it's competitive strategy (say from being a low cost providor such as Wallmart to a niche providor such as the UK's Tescos US venture Fresh & Easy) it's market share may have changed significantly however this calculations strips out that effect to show he stock picker the net profitability affect. Let's look at an example:
A company has a market share of 35% and makes $500m profit. After changing it's strategy from a cost leader to a niche player it's market share increases to 65% (within its new niche) and it's profit fall to $300m. The relative market share profit in year 1 is $175m as opposed to $195m in year 2. This tells the potential investor that though profit overall has fallen it is now in a dominate market share position and it's profitability of it's market share has infact increased by $20m. Assuming it can use it's more dominant market position to further increase it's market share then it's overall profit should rise also.
Obviously relative market share profit is not a tool that should be used on it's own when assessing potential investments. However when used with more subjective data such as strategies, market conditions etc it can be a powerful tool that helps the investor identify value stocks.