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4-8 Why is it sometimes misleading to compare a company’s financial ratios with those of other...

4-8

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

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Answer #1

It is primarily because different companies have different business models. For example, Amazon could be classified as a retailer however it has a very different business model than let's say, Walmart. Walmart has thousands of stores which are filled with inventory, which means it has to buy all those products and keep them on its shelf until they are sold. Amazon, on the other hand, does not have to hold any inventory. When we shop at Amazon, we pay them upfront through credit card and after receiving our order they could buy the product from the supplier and ship them to us. Hence, if you compare them through ratio analysis, you are likely to get very different numbers.

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