Financial Ratio Analysis - Inter-firm Comparisons

Inter-firm Comparisons

Let's take a look now at some of what we have talked about so far but in a different way. Here are the return on assets (ROA) and net profit margin values for several companies in the same (retailing) industry. What can we say about these results?

Company Industry ROA Profit Margin
Marks & Spencer Retailer and Financial Services 4.43% 3.91%
J Sainsbury Retailer and Financial Services 5.60% 3.61%
Thorntons Retailer of Chocolates etc 8.43% 6.45%
Next Retailer of Clothing 26.14% 13.82%
Dixons Group Retailer of Electronic etc Goods 19.78% 14.41%
Yates Group Retailer of Food 9.13% 13.34%
Safeway Retailer of Food 7.24% 4.14%
Morrisons Retailer of Food 12.93% 5.87%
Tesco Retailer of Food and Household Goods 9.99% 5.72%

Textbooks might lead us to expect that the ROA and Profit Margins for each company in an industry ought to be the same as each other - we don't see that here do we?

To try to isolate some patterns, though, we should classify this table even more than it has been already. What we mean is, look at the food retailers as a sub-group then look at the other major classifications and see if that helps to sort out what we are looking at.

Here's the above table reorganised ... does it help?

        Averages
Company Industry ROA Profit Margin ROA Profit Margin
Marks & Spencer Retailer Clothing, Food and Financial Services 4.43% 3.91% 15.29% 8.87%
Next Retailer of Clothing 26.14% 13.82%
Thorntons Retailer of Chocolates etc     8.43% 6.45%
Dixons Group Retailer of Electronic etc Goods     19.78% 14.41%
Yates Group Retailer of Food 9.13% 13.34% 8.98% 6.54%
Safeway Retailer of Food 7.24% 4.14%
Morrisons Retailer of Food 12.93% 5.87%
Tesco Retailer of Food and Household Goods 9.99% 5.72%
J Sainsbury Retailer Food and Financial Services 5.60% 3.61%
  Average 11.52% 7.92%    

Well, our sample of businesses in each sub-group is too small, apart from those that specialise in retailing food, where we have a sample size of five. There we can see that our average (arithmetic mean) gives a reasonable view of the group.

We can see that the sub-group for Marks and Spencer and Next does not give us such useful results, because there are only two businesses in the sample and the results for each business are significantly different from the other business.

The overall average for entire sector is also useful for us as it gives us a benchmark against which to assess all of the businesses within it. We can use this kind of analysis with all of the ratios we calculate and that will give us an excellent insight into individual businesses as well as the industries and the sectors for which we have data.

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