Financial Ratios Comparison
The companies’ financial ratios can be compared with the ratios of other equivalent companies between business sectors at one point of time. These comparisons provide explanations on the relative financial status and performance of the company compared to the relative performance of its competitors. Comparisons are usually made with other companies in the same business sector and the benchmark is assumed to be the suitable value for a company. The assumption here is for the companies in the same business sector to have the almost identical financial ratios. If the ratio of a company shows a significant difference with the standard ratio, then further investigation must be done to find the cause of that difference. For evaluation, a company’s financial ratio is compared to the competitors one by one, and then classified as satisfactory or unsatisfactory, depending upon the direction and how far it has diverted from standard. The table below summarizes the comparison and evaluation of ratio analysis for the companies between business sectors:
RATIO | COMPARISON / EVALUATION | | | lllllllllllllll a. Liquidity
The company’s achievement in current ratio and quick ratio are much different compared with the industry. Overall, the company’s liquidity is rather satisfactory. b. Asset Management
The company’s inventory management is quite satisfactory. The company might face problems with its account receivables as the collection period for the company is higher compared to the industry. Therefore, attention has to be given to the management of account receivables. c. Leverage
The level of the company’s debts is higher than that of the industry average. However, the ability of the company to pay interests is better compared to the industry. d. Profitability
Profitability, relative to the investors (as seen in the return on asset and return on equity ratios) of the company is better compared to the industry. This is the same with the gross profit
RATIO | COMPARISON / EVALUATION | | | lllllllllllllll a. Liquidity
The company’s achievement in current ratio and quick ratio are much different compared with the industry. Overall, the company’s liquidity is rather satisfactory. b. Asset Management
The company’s inventory management is quite satisfactory. The company might face problems with its account receivables as the collection period for the company is higher compared to the industry. Therefore, attention has to be given to the management of account receivables. c. Leverage
The level of the company’s debts is higher than that of the industry average. However, the ability of the company to pay interests is better compared to the industry. d. Profitability
Profitability, relative to the investors (as seen in the return on asset and return on equity ratios) of the company is better compared to the industry. This is the same with the gross profit