Question

Please provide a detailed explanation:

Assume that you work for a multinational company. You manager has informed you that different stakeholders would like to know how the firm is performing relative to the competitors.

ii) Briefly discuss 2 difficulties an analyst is likely to encounter when comparing the ratios of similar corporations from different countries.

Answer 1

Firstly the currency used by the two corporations will differ. This will create the requirement of converting the currency into comparable currencies. The analyst will firs thave to convert the financial statements of the corporations into same currency to be able to compare the ratios of the two companies.

Secondly the business environments of the two companies will create differences. Suppose a country has accounting income as the tax basis, the company in that country will have lower accounting income. This can be misleading for the purpose of comparison since actually the company may be profitable but the ratios will say otherwise.