Financial ratios differ across industries because the operations in the industries are quite diverse. Depending on the financial position and strength of the industry, the financial ratios would be lower or higher. The differences in the financial ratios help to portray a clearer picture of the specific industry on the market. It is also imperative to point out that every industry has its peculiar trends that contrast other industries. The industry trends have weighty impacts on the financial position and strength of organizations on the market. As such, it is probable to have different financial ratios among firms operating in the same industry.
The comparison of the financial ratios across industries can be applied using the US communication services industry and the alcoholic beverages industry. The communication services industry is a lucrative market with high sales and margins as compared to the alcoholic beverages industry, which is a smaller market in terms of financial position. Some of the ratios that will be applied to show the comparison of these industries include the gross margin, working capital, and leverage ratio. The gross margin of the communication services industry is quite high at 78% while that of the alcoholic beverages is at 46% (CSI Market, 2019). The difference portrays that the communication services industry has greater sales as compared to alcoholic beverages industry. The working capital ratio of the communication services industry is smaller at 0.99 while that of the alcoholic beverages is at 1.51 (CSI Market, 2019). The greater current ratio of alcoholic beverages industry indicates that the industry has superior liquidity as compared to the communication services industry. On the other hand, the leverage ratio of the communication services industry is 2.49 while that of alcoholic beverages industry is 1.29 (CSI Market, 2019). The high leverage ratio of the communication services industry depicts that this industry is capital extensive as compared to the alcoholic beverages industry.
Delegate your assignment to our experts and they will do the rest.
Financial ratios are mainly used in analyzing the financial statements to deliver clarity to the investors. The financial ratios are also used to study trends in the financial performance of organizations. One of the limitations of financial ratios is that the figures used to compute them might be inaccurate ( Greco, Figueira, & Ehrgott, 2016). The financial ratios also have a comparability problem because different companies employ differentiated accounting methods. Lastly, financial ratios fail to incorporate other aspects that affect the financial performance of a business such as the industry performance, general economic situation, and size of the firm.
References
CSI Market. (2019). Communications services industry financial strength information . Retrieved from https://csimarket.com/Industry/industry_Financial_Strength_Ratios.php?ind=905
CSI Market. (2019). Alcoholic beverages industry financial strength information . Retrieved from https://csimarket.com/Industry/industry_Financial_Strength_Ratios.php?ind=501
Greco, S., Figueira, J., & Ehrgott, M. (2016). Multiple criteria decision analysis . New York: Springer.
