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Financial Ratios: Industry Similarities

Question: Why is it sometimes misleading to compare a company's financial ratios with those of other firms that operate in the same industry?

Solution Preview

One would think that businesses in the same industry would operate very much alike, but that generalization simply isn't true. Companies can be as different as people employed in the same company doing the same job.

For some specific differences, following is a short list of possible characteristics which could impact the financial ratios together with a brief example for each:

1. Size of the company: a small struggling company may have more debt and therefore a poorer working capital and debt ratio.

2. Age of a company: a young company in growth mode could have small profits or even losses that effect EPS ...

Solution Summary

This solution gives a list of 12 reasons or situations which could cause ratio analysis to be totally different even for companies within the same industry. Each reason is supported with a sentence or two which demonstrates the differing effects on financial ratios.

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