What does it mean to benchmark by industry? Why is this needed when conducting a financial ratio analysis?
What will be an ideal response?
Answer: By benchmarking to an industry, we mean that the firm's performance as measured by financial ratios should be compared to a benchmark such as its industry average ratio or its key competitor's ratios. This is needed because a ratio by itself has little meaning without some standard of comparison. For example, a student scores 80 out of 100 and believes this is slightly above average. The instructor informs the class that 82 was the highest score for all 50 students. The student who received an 80 now realizes (s)he performed better than just slightly above average.
You might also like to view...
When a seller is providing seller financing, the approved Contract to Buy and Sell permits the seller to terminate the contract based on the buyer's credit information.
a. true b. false
In order to increase the net profit of a business, the NMC of any proposed strategy must ________
A) be equal to the current NMC B) be equal to the difference of the current NMC and the marketing and sales expenses C) be equal to the total operating income D) be lower than the current NMC E) exceed the current NMC