Week 1 Discussion 2: What are the four standards for comparisons in financial analysis? Give an example of each.

What are the four standards for comparisons in financial analysis?  Give an example of each.

Week 1 Discussion 2: What are the four standards for comparisons in financial analysis? Give an example of each.-Sample Solution

The Standards of Comparison in Financial Analysis

Financial analysis refers to the procedure companies undertake when analyzing their projects to determine performance (Schroeder et al., 2019). Notably, Schroeder et al. (2019) explain that there are various comparison standards a company can use to examine their balance sheet, financial, cash flow, and income statements. They include comparing the company’s current performance with prior periods. In this case, the companies prepare a balance sheet, income, cash flow, and financial statements using data from previous periods and comparing it with the current periods. It can then perform ratio analysis to evaluate its profitability or insolvency. For example, it can compare its debt-to-equity ratio for the past five years, which can be 0.2, 0.5, 1.1, and 1.6, indicating that it is increasingly financing its assets through equity.(Comparisons in Financial Analysis Essay-Sample)

Another standard is comparing the company to its competitors. A company can determine its performance by comparing its financial aspects with competitors (Schroeder et al., 2019). It can compare its financial ratio analysis to that of the competitor. For example, a company like Toyota may have a good gross profit margin of 20% higher than its competitor Tesla, which has a 5% margin. Also, financial analysis can be based on industry average. Industry averages are effective benchmark tools for determining a company’s position within an industry. Industry average financial ratio, such as the Asset Turnover ratio, represents how it efficiently uses its assets to generate profits. For example, retail companies may have an average industry ratio of 2, meaning that if the company has an average industry ratio of 1.5, it is not performing well. Lastly, Schroeder et al. (2019) observe that financial analysis can be based on an industry baseline, which evaluates a company’s current performance based on records. Industries use the baseline to manage projects and sales and determine horizontal financial analysis. For example, the current baseline ratio for industries is 1, meaning that a company with 1.5 indicates that it is effectively meeting its short-term debt obligations.(Comparisons in Financial Analysis Essay-Sample)

Reference

Schroeder, R. G., Clark, M., Cathey, J. M., & Schroeder, R. G. (2019). Financial accounting theory and analysis: Text and cases. (12th ed.). Hoboken, NJ: Wiley