Question

How do you think financial ratios differ across different industries? Compare two industries of your choice and select a few ratios and explain whether you think the ratios would be higher or lower for each of those industries and explain why.

Answer 1

Financial ratios are tools for evaluating a company's financial health in terms of its profitability, liquidity, solvency etc. The ratios differ across different industries because the parameters based on which different sectors work is different, nature of business, regulatory conditions etc are different.

For example, the inventory turnover ratio which shows how well the inventory is managed to increase sales, will be much higher for a retail store (grocery) due to faster sale of inventory as compared to that of a Car dealer. The car dealer's operating cycle, i.e, time required to convert inventory into cash is much higher as compared to that of a grocery store. The gross profit or net profit margins are generally higher in case of car dealer due to higher profit margins/ markups on the cars, as compared to grocery store which sells daily essentials that are low on profitability per unit.