Question

Week 3 DQ #1 (Corp Fin)

Your boss, the CEO, asks you to analyze our company's performance in relation to our competitors, but she only gives you a short timeframe for the project. You can do this either by comparing the firms' balance sheets and income statements or by comparing the firms' ratios. If you only had time to use one means of comparison, which method would you use and why? What are the drawbacks of using your selected method? It is commonly recommended that the managers of a firm compare the performance of their firm to that of its peers. Increasingly, this is becoming a more difficult task. Explain some of the reasons why comparisons of this type can frequently be either difficult to perform or produce misleading results.

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Answer 1

If one of the method to be employed would be comparing the firms ratio for better understanding of company's performance in relation to its peer. This would help us to know our companies profitability as compared to our peers whether the profit margin is not less, the gross margin and sales are more than the peers. Comparing liquidity ratio will help us understand our position with the peers that whether our liquidity is good or bad. It will also help us to identify whether the return on equity of our company is more or less as compared to peer. Ratio analysis gives us broad review about our performance as well the performance of the peer whether we require improvement in any area as compared to our peers. The disadvantage is it will just give us numbers and not the actual reason for increase or decrease in the ratio as the complete working and data of the company will not be available with us. There could be different accounting principles used by two different companies. There could be a number of different divisions in the cmpany the bifurcation of which might not be available.

Difficulties faced for comparing the performance with peers

1) The major reason would be that we might not have the omplete data of the peers their strategic of how they are making revenues, how there is cost savings. The data available will be only financials which will not give correct or complete view of the performance of the company.

2) We would not get the details of the customers and suppliers of the peer as the data is not publicly available for every peer.

3) It is difficult to get data on the internal policies of the companies which generally leads to success of the organisation as the data is not publicy not available.