From the e-Activity, determine why it is sometimes misleading to compare a company’s financial ratios with those of other firms that operate within the same industry. Support your response with one (1) example from your research.
It is misleading because different firms in the same industry vary in operations and have different investments from their main operations. This difference makes ratios in investment and operations (profitability, efficiency, and liquidity) differ significantly. For instance, Coca-Cola and Pepsi are in the same industry but they have different investments. Pepsi has other businesses like Quaker in a different industry. Comparing financial ratios for Coca-Cola and Pepsi will mislead because the two companies, though in the same industry, Pepsi will have higher investment ratios than Coca-Cola . On the other hand, Coca-Cola , being a company in the maturity stage will have higher profit margins than Pepsi. In 2014, Pepsi had a profit margin of 9.77% while Coca Cola’s was 15.43%.
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It can also be misleading because different firms in the same industry vary in their methods of computing financial ratios. For instance, in calculating the quick ratios of a firm for liquidity, a company may include inventory while another may not hence difference in calculation methods and results.
From the scenario, determine two (2) strategies that TFC could utilize to reach its expansion goals. You may, for example, consider your analysis of TFC’s financial statements, as well as your knowledge of TFC’s excessive cash position. Provide a rationale for your response .
One strategy is for TFC to minimize their purchase costs in weight machines and equipment. As TFC expands, it will require more of these products meaning higher expenses. TFC needs to manage their weight machine and equipment costs to ensure expenses do not exceed their income. Reducing the costs can also help improve the cash flow stability of the firm. In investing, the company has to ensure that their outflow does not exceed the inflows for them to realize returns. TFC can negotiate prices per unit with their suppliers to reduce investment cost. They can also strategize bulk buying to take advantage of the discounts and benefits of this purchasing strategy. This strategy to reduce costs will also help reduce the company’s long-term debt.
It is important for a company to determine their strengths, weaknesses, opportunities, and threats (SWOT). When expanding a business, a firm takes advantage of their strengths and opportunities to gain a competitive advantage. Understanding the weakness and threats will help take the right course of action for the firm to ensure they are controlled. For instance, one threat to TFC is high competition but by understanding this threat, TFC can differentiate their operations or services to gain competitive advantage. They can also use their strong cash flow (strength and opportunity) to control the weaknesses and threats. Understanding SWOT will help in expansion and sustainability of the firm after expansion.
