Benchmark

A benchmark means a basis for comparison. Most of the time, we talk about it in connection with returns, but it is also important in evaluating the company's operation.

The benchmark is for judging things that are difficult to judge by themselves. Is a 5 percent yield good? Of course, we could say that when we got used to hardly getting any interests on a bank deposit. 

With this, we already benchmarked the investment, as we compared it to bank interest rates. But we are not on the right track, since we did not take into account that bank deposit interest rate is one of the safest investments, that is, we omitted investment risks from the comparison. In fact, we also omitted inflation. A 5 percent return with 4 percent inflation, for example, is not so attractive, since at the end of the year, we only gain 1 percent with it, that's our real return. 

So we do better if we compare our investment to some other investment with a similar risk and judge whether the investment is good or bad. Investment fund managers also do this when they report on the results of their own activities. For example, an American stock fund will most likely compare its return to the Dow Jones index, and a fund investing in technology companies to, say, the Nasdaq index. 

But we can talk about benchmarks not only in the case of returns, but in almost all areas of life. How to compare the performance of two electric cars? With acceleration? Maybe with it, if that's what's important to us, but usually we prefer to compare its range, charging speed and other practical aspects. 

This is also the case in the assessment of company operations. Companies are compared to their competitors or to the industry's best performers based on some indicator that characterizes their operation. Such an indicator can be, for example, EBITDA, which indicates the actual profit-generating capacity. However, ROA, the indicator of return on assets, is also often used. And if we don't want to judge the company as a whole, but only one of its departments or some process, then we try to form some kind of comparison basis - i.e. KPI - from similar departments or processes of other companies in order to be able to judge our own.

In addition to the above, we also benchmark when we compare a current event with a previous similar event in order to get an answer as to what the consequences of the current event will be. Few people know that this is typically how weather forecasting works, but we can also find examples in the prediction of economic events.  

The essence of benchmarks is therefore to associate a suitable benchmark with the question that is the subject of our investigation. When the economic crisis caused by Covid broke out, it was often compared to the Great Depression of 1933 or the financial crisis of 2008. However, the nature of the Covid crisis has become quite different from what these crises were, so the descriptions based on them have also proven to be inaccurate regarding the pace of recovery.