Analysts never finished trying to beat the market. We've seen the creation of ways to value companies, and new methods are popping up every day. This makes people often forget the traditional methods that provide important details about the strength of a company. Market share is one of them. Calculating market share will help you determine the strength of a company. When implemented properly, this method can show the company's prospects in the future.
Step
Part 1 of 3: Calculating Market Share
Step 1. Determine the period you want to examine for each company being analyzed
Check sales in a certain period to make sure the comparison to be made is valid. You can check sales for a quarter, a year, or several years.
Step 2. Calculate total revenue or total sales
All publicly traded companies must issue quarterly or annual financial reports. These reports will include all of the company's sales figures, and may also include a description of sales of certain products or services in the footnotes of the financial statements.
If the company being examined sells a wide variety of products and services, do not use the total sales of all products and services to be examined. Look for information on sales of certain products or services in the financial statements
Step 3. Find total market sales
This figure represents the sales (or revenue) of the entire company to a particular market.
- Total market sales figures can be found through public reports from the relevant Industry Trade Association. Several companies offer specialized information services regarding sales in national and international market sectors.
- You can also add the sales of the largest companies that sell or offer products or services to the market. If a number of firms dominate the market so much that the sales figures for the smaller firms are insignificant, the sales figures for all these large firms may represent the total sales for the industry.
Step 4. Divide the company's total revenue by the industry's total sales on the market
The result of this division is the market share of the company. So, if a company has sales of a certain product of $10,000,000, and all the companies in the industry generate sales of $150,000,000, the company's market share is $10,000,000/Rp150,000,000 i.e. 1/15.
Some people present market share in percentage terms, while others use ordinary fractional numbers (some people don't even simplify the number to the smallest fraction). The form of presentation is not important, as long as you understand the meaning of the number
Part 2 of 3: Understanding the Role of Market Share
Step 1. Understand the company's market strategy
All companies create unique products and services and offer them to the market at different price levels. The goal is to attract certain customers so that the company is able to maximize profits. A large market share (either measured by units sold or total revenue) does not always mean that it is able to generate high profits. For example, In 2011 the market share of General Motors was 19, 4%, six times more than the market share of BMW (2, 82%). In the same period GM reported a profit of 9.2 billion dollars, while BMW reported a profit of 4.9 billion euros (5.3 billion dollars). Whether measured by units sold or total revenue, BMW shows higher profitability than GM. In addition to market share, profit per unit is also one of the main goals of all companies.
Step 2. Define market parameters
Companies aiming for market share growth may adopt a consistent strategy. Let's again use the example of the automotive industry, BMW knows that not all car buyers are potential customers. BMW is a luxury car maker, and less than 10% of car buyers buy luxury cars. Luxury car sales are only a fraction of the total 12. million cars sold in America. BMW sold 247,907 cars in 2011, more than any luxury car maker including GM's Cadillac and Buick.
Clearly identify the market segment you want to research. You can research in general, focus on total sales, or be limited to specific products and services. You should define the boundaries of research when examining each company's sales so that the comparisons are truly one-of-a-kind
Step 3. Identify changes in market share each year
You can compare the performance of one company from year to year. You can also compare the performance of all companies in the same industry and period. Changes in market share can mean the company's strategy is effective (if market share is increasing), flawed (if market share is decreasing), or is not being implemented effectively. For example, a number of BMW cars were sold and their market share increased from 2010. This suggests that marketing and pricing strategies are more effective than competitors such as Lexus, Mercedes, and Acura.
Part 3 of 3: Understanding Market Share Strengths and Limitations
Step 1. Find out information about a business given market share
Market share is not the end result that says everything you need to know. Market share is precisely the tool to start the analysis. You should know the strengths and weaknesses of market share as an indicator of value.
- Market share is a great tool for comparing two or more companies that are competing against each other in the market. Market share can show the level of competition of companies in an industry.
- As a result, market share can indicate the growth of a company. If a company experiences an increase in market share for several consecutive quarters, it more or less knows how to create and market a product that its market is interested in. This can be true for the opposite.
Step 2. Understand limited market share as an indicator
As discussed earlier, market share is a limited tool that can help develop an initial perception of a company. Market share value is meaningless if it stands alone.
- Total revenue as the sole determinant of market share provides little information regarding the company's profitability. If one company accounts for most of the market share but generates less profit (revenue minus expenses) than another company, market share is a less substantial indicator of the company's current and future success.
- Market share can provide more market-related information than companies. Some markets have been consistently dominated by one or a small group of companies, and little has changed over the last few years. Monopoly power is almost impossible to beat by other companies in the market so market share analysis will only confirm this fact. However, small companies are still able to achieve success and have good profitability.
Step 3. Think about how market share will shape your investment strategy
Market share can show how far a company is leading or lagging in its market. This information can certainly influence your investment decisions.
- You should not invest in companies that have not experienced market share growth over the last few years.
- You can monitor companies that have had market share growth over the last few years. The value of this company is likely to continue to rise, unless the company's management and profitability are poor. You can see this by analyzing the company's financial statements.
- Companies that are experiencing a decline in market share may be in trouble. Market share is not the only factor in determining a company's performance, but you may want to stay away from this company if it has declining profits or no new products or services are being offered.
