Question

Discussion: Comparing Ratios

Does it make sense to compare the ratios of firms in different industries? Why or why not?

Answer 1

Ratios- Ratios are the representation of company's financial condition. It is the relationship between two variables in terms of numbers.

Compare the ratios of firms in different industries- Investors compare the ratios of different companies but that belong to the same industry as that will give you compatible comparison. Companies of different industries cannot be compared with the help of ratios. Each and every industry has its own features, life cycle, product and services. Two different industries cannot be compared. Big technology companies have higher P/E ratio than other companies in other industries. Amazon's P/E ratio in 2018 is 250 that is higher while on the other hand some other company's P/E ratio is 20 only so these two ratios tell you nothing in comparison.

Oil and Gas companies have lower P/E ratios. Same with liquidity ratios, Retails outlets have lower quick ratio while property management companies have higher quick ratio. Two companies or industries are comparable when they have products or service or something common, ratios of companies with different backgrounds cannot be compared, if it is done, they won't provide accurate and fair comparison.