When evaluating financial statements, why do we care about the industry? Why is this part of...
When evaluating financial statements, why do we care about the industry? Why is this part of the first steps of financial statement analysis?
Homework Answers
The financial statements of any business provides valuable information about its performance and its present status. However the financial statements need to be analyzed in conjunction with the industry analysis. This is because when the ratios are analyzed they need to be seen and compared the ratios of the other firms in the same industry. Let us consider an example:
The Net profitability ratio of the company X in the retail industry is 35%. When considered in solitude this seems like an impressive figure. However when we consider the industry in which the company operates, it may not seem very good. This is because the retail industry in the present scenario has a profitability ratio of more than 50%. Hence we need to consider the financial statements of a company in light of the industry in which it operates to be actually able to analyze its performance.
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