The value of the industry barriers rating reflects the difficulty that any company outside the sector, or within that sector but with a low market share, would have growing within the industry by taking market shares from incumbent companies.
This rating is related to the company's industry. All the companies of the same industry will have, therefore, associated the same rating value. This rating value must be analyzed together with the company size relative to industry rating. We can expect four possible scenarios: (1) high industry barriers rating along with a large company within the industry, (2) high rating value but a small business within the industry, (3) low rating value and a large companies within the industry and (4) low rating and small size company relative to the industry. Let's analyze at each case separately.
It is the best scenario from the investor point of view. The large relative size of the company within its industry (identified by having a high value in the size rating relative to the industry) and the high barriers to entry, it's an indication of the difficulty of removing market share that any other small company, within or outside the industry, will have if it wants to expand within this industry. Therefore, this is a a scenario of stability for the company. It is not expected to lose market share (revenue) and this facts reinforces the value calculated for the rest of the ratings since it is expected that the past conditions used to calculate such ratings will be maintained in the future.
This is not such a desirable scenario for the company because it has market share within the industry, and with very low probability of growth because of the industry high barriers to entry.
The company enjoys a larger market share than most companies in the same industry, however, due to the few existing barriers to entry, the rest of small companies, or any other company outside the industry could take up its market share.
Despite being a company with little market share, it has the potential to capture market share from competitors within the industry because of the low level of entry barriers. However, once it acquires this additional market share, it will be difficult to defend itself precisely because of this low barriers.
In order to estimate the level of barriers to entry of a certain industry, Gradement uses the level of stability of the market shares of the largest companies within the industry during the last five accounting periods.