Question

When we conduct the ratio analysis for company A in fiscal year 2010, which one of the following is the best benchmark we should use?

A. The performance of Company A in fiscal year 2009.

B. The average performance of Company A in fiscal year in 2007, 2008, and 2009.

C. The performance of Company B, which is in the same industry as Company A, in fiscal year 2010.

D. The average performance of the industry where company A is in for 2010.

E. None of the above.

Answer 1

Option D. The average performance of the industry where company A is in for 2010.

when we compare with the industry averages we are comparing with all the firms in the industry which helps us to analyse the performance of company A with a certain degree because the industry average includes the market effect on the all companies in the industry.

Thus Industry average is the best benchmark

Option A is incorrect we get performance information when compared with past year but we need to know the market effect as well

Option B is incorrect we get performance information when compared with average of past 3 years but we need to know the market effect as well

Option C is incorrect we performance information of few ratios when we compare with company B but comparing with industry includes the company as well