Question

What are the potential benchmarks that you could use to compare a company’s

financial ratios? What are the pros and cons of these alternatives?

Include the following words/phrases:

comparison to firm's prior history,

comparison to firm's expected or budgeted performance,

comparison to industry average,

comparison to market.

Answer 1

Potential benchmark that can be used in order to compare company financial ratios are as follows-

A. Comparison to the prior history of the firm-one can compare the company's current performance with previous performance and it will help the analysts to find out the changes in company's capital structure or gross margin and improvement in return of asset and improvement in return of equity so it will be useful in order to find out whether the company has exceeded its own performance in recent year or not.

B. Comparison to the firm expected or budgeted performance can be helpful in order to find the management external analysis forecasting and this will be helpful in finding out how will the firm performed related to the expectations.

C. Comparison to the industry average will be helpful in order to find out the performance of the Company against the industry and it will be comparing the firm's return on sales asset turnover and financial leverage and they will be compared with the industry and then it is found out whether the company is a industry leader or a company is a industrial laggard, and it will be helpful in finding out which type of strategies company is adopting in order to compete with the industry.

D. Comparison to the market will be helping in benchmarking the performance of a company against the market and it will helpful to know about the investor preference and when the firm is a strong performer relative to the industry it will be outperforming. Market analysis can be difficult in many key financial ratios which are industry specific and do not lend themselves to cross-industry comparison.