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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?

Learning Outcome Statements

b. compare methods by which companies can be grouped, current industry classification systems, and classify a company, given a description of its activities and the classification system;

c. explain the factors that affect the sensitivity of a company to the business cycle and the uses and limitations of industry and company descriptors such as "growth," "defensive," and "cyclical";

d. explain how a company's industry classification can be used to identify a potential "peer group" for equity valuation;

CFA® Level I Curriculum, 2020, Volume 5, Reading 40

User Contributed Comments 4

User Comment
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?
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Colin Sampaleanu

Colin Sampaleanu

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