Question

why it is sometimes misleading to compare a company's financial ratios with those of other firms that operate within the same industry. Support your response with one (1) example from your research.

Answer 1

Firms within a similar industry may utilize diverse accounting procedures that make it hard to look at financial proportions. Accounting information utilized in calculation of proportions is influenced by the evaluations, presumptions and diverse accounting methods utilized by organizations. A precedent is an organization that utilizes First in, First Out method to esteem its inventory will have a higher inventory esteem contrasted with the organization that utilizes Last in, First Out method. Proportions registered from such information vary and they give misleading information when used to look at the two organizations regardless of whether they work in a similar industry.

Ratios disregard the subjective factors, for example, the expertise of human capital that assumes a vital job in the headway of financial execution of an organization.

All the more essentially, correlations might delude if firms in a similar industry contrast in their different investments. For instance, comparing PepsiCo and Coca-Cola might deceive in light of the fact that separated from their soda pop business, Pepsi likewise possesses different businesses, for example, Frito Lay and Quaker.