Relative Market Share Profit – Great Tool For Stock Picking
August 30, 2018
August 30, 2018
Relative market share profit reflects a reasonable cash generation, because the higher the market share of a company, the more cash will be generated through sales. As a result of increased market share, it is usually assumed that the company will be able to increase its earnings at a faster rate than if it remained the same size.
This increased growth typically stems from being able to reduce the cost per unit or variable cost of its products. One example of how this can happen is the marginal cost or cost to produce one more unit will not have to include extra costs for say fixtures and fittings of the factory. In essence it means the more a company produces, the more profitable it should be.
One way to measure a brands relative market share is simply not by the percentage of the market it has (through revenue) but instead by comparing a company's sales relative to its largest competitor. For example if say Stockbroker A has a market share of 20 percent, and the largest competitor had the same, the ratio would be 1: 1. If the largest competitor had a share of 60 percent; the ratio would be 1: 3, implying that the organization's brand was in a reliably weak position.
The definition of a high or dominant market share can be hard to define. However stock pickers and investors usually recognize a brand leader if they have a market share double that of the second brand, and triple that of the third. In such a case the company would certainly be considered a market leader.
The reason for choosing relative market share, rather than just profits for smart stock investing analysis, is that it provides the investor with a more content rich measure with which to compare as opposed to just plain profit margin information. Not only can it be used to compare the stock with its competitors but also to itself over time, allowing to the true affects of any changes in strategy.