Question

What methods can we use to do an analysis of different companies, our company over time or compared to our competition, different size companies and companies in different industries?

Answer 1

Ratio analysis is the best method that we can use to compare different companies ,our company in different time periods ,comparison with competitors with in same industry , different size companies and companies in different industries and sectors.

• There are different methods to compare companies like comparative statement, common size statement , cash flow statement ,fund flow statement, ratio analysis etc.
• Common size statement only useful for comparison of a company in different time frame ,but not at all suitable for inter companies comparison.
• Comparative statement only speaks about the difference in figure ( volume ) as well as its percentage but not fruitful for small and big companies financial performance comparison .
• Similarly cash flow statement and fund flow statements are the outcomes of financial statement, so it can't provide a best informative support for comparison because it only showed the difference in terms of volume but actual comparative representation can't be shown.
• Ratio is the expression of the mathematical relationship between to figures. It helps to compare financial data which are inter related with each others. With the help of different types of ratios, liquidity, solvency , profitability, activity based performance of any company can be judged .It also helps to compare different companies with same or different segments competitors ,and also same company's performance in different accounting year . It helps in trend analysis of a company or for making trend analysis for different companies .