Question

Discuss the three different ways a financial manager can choose a benchmark. Provide an example for each.

Answer 1

Answer -

Financial Manager can use these three Benchmarks.

1) Trend Analysis

2) Industry average analysis

3) Peer Group Analysis

Particulars	Trend Analysis	Industry Average analysid	Peer group Analysis
Explanation	Trend analysis is the process of evaluating the performance of firm by comparing it with the historical data of firm	Industry Average analysis is the process of evaluating the performance of the firm by comparing it with the other firms of same industry	Peer group Analysis is the process of evaluating the performance of the firm by comparing it with the competitors of firm who are in its line of operations or Industry.
Example	It is also called as horizontal analysis. Suppose Long term in year 2016 is $2000 and in 2017, it is 3000. Trend Analysis will be percentage change in it i.e. ($3000 - $2000)/$2000*100 = 50% increase i.e. it is analysed that company has borrowed the additional debt of $1000 in one year	In industry analysis, one of the example is assessing the performance of firm against industry average. Suppose, Debt ratio as per industry average is 1.5 and debt equity ratio of firm is 1.25. Analysis of such ratio establish the fact that firm is in good position as compared to industry performers	In peer group analysis, its main competitors are considered who are in same line of operation. Suppose the quick ratio of peer group is 0.90 and quick ratio of firm is 0.97. Further interpretating the ratios, it can be said that firm is doing well than its competitors since firm has higher quick ratios.