- CFA Exams
- 2024 Level II
- Topic 5. Equity Investments
- Learning Module 40. Introduction to Industry and Company Analysis
- Subject 3. Industry Classification Systems
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Subject 3. Industry Classification Systems PDF Download
Commercial industry classification systems include:
- The Global Industry Classification Standard (GICS) is an industry taxonomy for use by the global financial community. It is used as a basis for S&P and MSCI financial market indexes in which each company is assigned to a sub-industry and to a corresponding industry, industry group, and sector, according to the definition of its principal business activity.
- The Russell Global Sectors classification system uses a three-tier structure to classify global companies based on the products or services they offer.
- The Industry Classification Benchmark (ICB) categorizes individual companies into subsectors based primarily on their source of revenue (or the majority of revenue).
Various governmental agencies use a number of classification systems to facilitate the comparison of data over time and among countries that use the same system. These systems include:
- The International Standard Industrial Classification of All Economic Activities (ISIC) is used by the United Nations, its agencies and many countries in the world.
- The Statistical Classification of Economic Activities in the European Community (NACE) is the European version of ISIC.
- The Australian and New Zealand Standard Industrial Classification.
- The North American Industry Classification System.
The structures of these systems are very similar. The limitation of current classification systems is that the narrowest classification unit assigned to a company generally cannot be assumed to constitute its peer group for the purpose of detailed fundamental comparisons or valuation.
Peer Group Analysis
This is the practice of comparing a firm's results to those of similar firms.
Commercial industry classification systems often provide a starting point for constructing a peer group. Start with companies in the same industry, review the subject company and its competitors' annual reports, and confirm that each comparable company's primary business activity is similar to that of the subject company. Useful questions to ask are:
- What proportion of revenue and operating profit is derived from business activities similar to those of the subject company?
- Does a potential peer company face a demand environment similar to that of the subject company?
- Does a potential company have a finance subsidiary?
User Contributed Comments 4
|johntan1979||NACE = Nomenclature statistique des Activités économiques dans la Communauté Européenne [French]|
|jonan203||lol, i was wondering how they got NACE from SCEAEC|
|Shaan23||John1979 shouldnt have to write this exam to pass. He should write the exam to administer it.|
|farhan92||but he won't be able to provide the answers to the questions or he would be violating the standards? Anyone care to hazard a guess as to which standard would be violated?|
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
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