Question

1) Discuss in a sentence the relevance of historic, industry, competitive, and market benchmarking with respect to financial ratios (i.e., advantages and challenges for each of the four). What, if anything, is revealed in the analysis? What makes benchmarking difficult?

Answer 1

1. Historic benchmarking: This helps in seeing how the firm has performed when it compares with the past for example if EPS in 2011 was $23 now in 2018 EPS is $28 it means the company is doing well
2. Competitive benchmarking: How the company is performing in comparison to the competitors is determined by competitive benchmarking, for example, Apple and Microsoft are two competitors and in financial ratio return on assets for Apple is 24% and 29 % is for Microsoft. So we can say Microsoft is doing well in terms of utilizing the assets when compares to Apple.
3. Industry benchmarking: We can also assess the health of the company by comparing the financial ratio of the company with an industrial standard. For example, Industry current ratio is 3 and the company current ratio is 4 it means when compared to industry the company ahead of managing money.
4. Market benchmarking: Even in Market benchmarking financial ratio helps a lot for example in the market expecting a EPS of $4 and company EPS is $2 it meaning company needs to improve its performance for investors expectation in the financial market.

What makes benchmarking difficult?

In the end, they are number and only valid with a proper context at the same time they can be manipulated for the wrong reason. It is difficult to decide what should be the benchmark. The historical data sometimes remain irrelevant in today’s context. If you doing Competitive benchmarking it is difficult to find the right kind of comparing competitive. In the industrial benchmarking the new companies will find irrelevant since they are very new in the market