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In: Finance

You are comparing the common-size financial statements for two firms in the same industry that have...

You are comparing the common-size financial statements for two firms in the same industry that have very similar operations. You note that their sales revenues are similar in dollar value but yet the common-size EBIT for one firm is 30 percent compared to only 26 percent for the other firm. What are some possible explanations for this difference given the strong similarities of the two firms?

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Expert Solution

Earning before interest and taxes can be different for both the companies because there can be difference in their overall depreciation technique which is adopted by these companies as there are various methods of depreciation which are differently adopted by different companies.

This difference can also be attributed to difference in the method of the inventory valuation because various companies are generally using different methods of valuation so their books of accounts are not in line with each other.

The difference in earning before interest and taxes can also be attributed to the various types of of expenses and cost of goods sold which are generally differing in both these companies due to which the the overall earning before interest and Taxes are different.

Hence the earning before interest and tax for various companies can be different even if there are similar to large extent.

jeff jeffy answered 2 years ago
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