In ratio analysis we look to find out how effectively a company uses its assets,

Question

In ratio analysis we look to find out how effectively a company uses its assets, its equity and its debt to generate profits. In general a business that is more effective, should generate more profit per dollar of investment. However, given that different businesses require different concentrations of assets, and also have different opportunities for leverage, is it fair to compare the ratios of businesses in two different industries or should ratio analysis be restricted to comparing like businesses?

Explanation / Answer

It is certainly not fair to compare ratios of businesses in different industries as different industries have different features. Businesses must idelaly to compared to their own undustry benchmarks in order to follow accounting standard of reliability and standardisation. Like businsses can use ratio analysis for analysing those businesses.

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