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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Why is it sometimes misleading to compare a company’s financial ratios with those of other firms that operate in the same industry? |
Here is a tip:
Firms that operate in the same industry may still possess many internal differences, including in their accounting practices.
Explanation
It can be erroneous to compare firms within the same industry, because they may have different accounting methods as well as different services and products. They may also have different subsidiaries and investments in their portfolio.
Comparing Dell and Apple will be misleading because apart from their computer hardware businesses, Apple also owns many other businesses, and employs thousands of other hardware and software products, while Dell sell almost exclusively computers.
Verified Answer
It can be misleading to compare financial ratios of firms in the same industry due to their accounting methods.
Firms in the same industry space may also have variegated products and technologies.
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