Lesson 4 of 7 · 14 min
Profitability, market share trends and concentration (HHI)
The rest of the survey asks how profitable the industry is and which way that is moving, who holds market share and whether they are gaining it organically, and how concentrated the industry is, measured by the Herfindahl-Hirschman Index.
In short
- Best profitability measure: a time series of the distribution of ROIC (25th, 50th, 75th percentiles), which is capital-structure neutral; in practice, use listed peers or government/consultancy data.
- The trend in profitability (rising or falling) often matters more than its level.
- Market share = company revenue / industry size, best read as a range; the trend and the organic (non-acquired) change matter most.
- Low concentration usually means intense competition, unless the industry is service-oriented, local or highly differentiated; rising concentration (consolidation) usually means less intensity and higher profits.
- HHI = sum of squared market shares in whole numbers; a monopoly scores 10,000. Some regulators treat 1,500–2,500 as moderately and above 2,500 as highly concentrated.
- Rule of thumb: a deal in a highly concentrated market that raises HHI by more than 200 often faces regulatory challenge.
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