Pareto Analysis

Pareto analysis is a decision-making and prioritisation technique based on the Pareto Principle — the observation made by Italian economist Vilfredo Pareto that in many situations approximately 80% of outcomes (effects) are generated by approximately 20% of causes (inputs) — commonly known as the '80/20 rule.' In business and financial analysis, Pareto analysis is applied to identify the small number of factors, customers, products, or risks that have a disproportionately large impact on results — enabling management to focus resources where they will generate the greatest improvement. Applications include identifying the 20% of products generating 80% of revenue, the 20% of customers accounting for 80% of profits, or the 20% of defect causes responsible for 80% of quality failures. For equity analysts and investors on Ventura Securities, Pareto analysis is a useful framework for evaluating the revenue and customer concentration risk of companies — a business where 80% of revenue comes from a handful of clients carries significantly higher concentration risk than a diversified customer base, impacting valuation and earnings quality assessment.