why it is sometimes misleading to compare a companybs financ

why it is sometimes misleading to compare a companybs financial ratios with those of other firms that operate within the same industry. Support your response with one (1) example from your research.

Solution

Yes, it is true that it is sometimes misleading to compare a company financial ratios with those of other firms that operate within the same industry. There is some reasons behind this, let’s look those reasons one by one.

1. As we know that performance of two or more companies can be compared with the help of financial ratios if those firms are operating in same industry but sometime such performance comparision may be misleading because each firms can have different size and different level of operations that is why comparision can not be made between two or more companies whether operating in same industry or not.

2. Sometime we see that two companies those are operating in same industry but may be at different stage. One company can be initial stage while other can be maturity stage that is why comparision with the help of financial ratios will not generate proper results hence such comparision may be misleading.

3. Some company may have specific financial strengths and weaknesses which may not be seen in case of other companies that is why comparision with the help of financial ratio may be misleading. Thus we can say that comparision on the basis of financial ratios may be sometime misleading due to difference between two or more companies etc.