Question

Your boss, the CEO, asks you to analyze our company's performance in relation to our competitors, but she only gives you a short timeframe for the project. You can do this either by comparing the firms' balance sheets and income statements or by comparing the firms' ratios. If you only had time to use one means of comparison, which method would you use and why? What are the drawbacks of using your selected method?

It is commonly recommended that the managers of a firm compare the performance of their firm to that of its peers. Increasingly, this is becoming a more difficult task. Explain some of the reasons why comparisons of this type can frequently be either difficult to perform or produce misleading results

Answer 1

1 I would use the firm`s ratios because will study them I would be able to have a clear picture on the complete financial health of the Company. The balance sheet has all the information concentrated but the financial ratio tells you how the company is doing on each category, for example quick ratio (acid test) excludes the inventory and tells you the relationship between the amount of assets that can quickly be turned into cash versus the amount of current liabilities.

The ratios provide details and balance sheet is the big picture

2 The comparison is difficult because companies do not like to show their financial statements, that is private information and they try to keep it as secret as they can. Sometimes produce misleading results because the company provided the incorrect information on purpose because they want to keep it secret.

Another difficulty is that there are companies that have more than 1 geographical location, this makes harder the comparison.

The financial results for a firm are also affected by various accounting practices and one-time events, such as a merger, acquisition, or divestiture.