One of the most effective ways to compare two businesses is to perform a ratio analysis on each company’s financial statements. A ratio analysis looks at various numbers in the financial statements such as net profit or total expenses to arrive at a relationship between each number. To ensure accuracy, it is usually best if both statements have been audited by a certified public accountant, or CPA.
Always compare apples to apples when evaluating two company’s financial results. It only makes sense to do a comparison of two companies in the same industry. Length of operation, business location, and types of products all play an important roll in a company’s financial results.
Comparing two company's financial results isn't the only measure of evaluating their profitability. For example, one business might be successful based on a key individual who may be leaving or retiring. In that case, the future results may not be as valid, because the prior results were based on the dependence of the key person.
Ensure that both financial statements have been audited or at the very least prepared by a neutral, third-party accounting firm, to help ensure the integrity and accuracy of the reported numbers. Also, verify that the numbers reported are from the same accounting period such as January through December.
Compare the statements such as the profit and loss and inventory to see if the results are reported in a similar fashion, says Analyst Prep. For example, net sales are usually reported as gross sales, less customer discounts, whereas some companies report net sales as gross sales, less discounts, and cost of goods sold. If this is the case, you’ll need to adjust one statement so that it matches the reporting method of the other statement.
Perform a ratio analysis on some of the key components of the statements. There are many types of useful financial ratios, including liquidity ratios, asset turnover ratios and financial leverage ratios, but some of the most important include the net profit ratio and the return on assets ratio, according to NetMBA. The net profit ratio is arrived at by taking the net, pre-tax profit shown near the bottom of the profit and loss and dividing it by the nets sales. For example, if net pre-tax profit is $100,000 and net sales are $200,000, the net profit ratio would be 50 percent ($100,000 divided by $200,000.)
The same ratio should be performed both statements. The other important ratio is the return on assets ratio. This is determined by dividing the net, pre-tax profit by the total assets shown on the balance sheet. This ratio helps determine how profitable a company’s operation is based on its own assets, such as cash, machinery and real estate.
Compare the various ratios of each company to see which is more or less profitable or efficient in its operation. You should consult with a CPA or financial analyst to help you with the comparison. If the businesses are dependent on large machinery in their operations, look closely at ratios that focus on assets. If the business relates more on commission- sales based on service, look closer at payroll to sales-related ratios. Put together a project report on the comparative analysis of two companies for everyone on your team to access. This is an assignment of Comparative analysis of Financial Statement of two Companies. This report is based on compare of two company’s financial situation. It has been prepared by a group of fore students for the Financial Accounting. This is based on two company’s financial position which is helpful for the companies and us to know the real situation. The three basic financial statements are (1) balance sheet, which shows firm’s assets, liabilities, and net worth; (2) income statement, which shows how the net income of the firm is arrived and (3) cash flow statement, which shows the inflows and outflows of cash caused by the firm’s activities. You Might Also LikeComparative Analysis of Two International Companies Trident University International Accounting for Decision Making - ACC501 April 22, 2013 Comparative Analysis of Two International Companies Caribou Coffee Company, Inc. is a leading coffee company in the United States that boasts the second largest premium coffee operation in the U.S. ("Caribou," n.d.). The Frazer Group is an international food services company, based in Finland, that seeks to grow with an optimistic view on it’s already firm grasp on the food service industry ("Frazer," n.d.). This paper will discuss the accounting standards, external auditing standards, and annual reports of the Caribou Company and Frazier Group. A brief comparative analysis …show more content…The report includes detailed financial statements as well as reports on new products and future projects designed to continue the company’s relevance in the market place and future success. In contrast to the Caribou Coffee annual report, the Frazer Group concentrates on the company’s past performance and current operations with an optimistic vision for continued success .("Frazer," n.d.). When comparing the two annual reports, the differences in formatting and commentary are apparent. The financial statements, however, are very similar in content. Many terms used in the reports vary, but the principle use of the data remains constant. Profitability. Which of these two companies is more profitable? Examining select data from the two sets of financial statements, and calculating simple ratios and percentages can easily answer that question (Table 1). Using the net profit on sales, one can determine how much profit results from the amount of revenue the company generates from sales. This is expressed as a percentage, and a higher number means less operating expenses. The current liquidity ratio determines a company’s ability to meet near term financial obligations. Again, a higher number is better for the company and represents the company’s financial position in near term operations. A debt to equity ratio measures the amount of debt a company owes in relation to the amount of total equity in the company. Any figure below 1.00 is good, and
When investors wish to compare the financial performance of different companies, a highly valuable tool at their disposal is ratio analysis. Ratio analysis can provide insight into companies' relative financial health and future prospects. It can yield data about profitability, liquidity, earnings, extended viability, and more. The results of such comparisons can mean more powerful decision-making when it comes to selecting companies in which to invest. It's important that investors understand that a single ratio from just one company can't give them a reliable idea of a company's current performance or potential for future financial success. Use a variety of ratios to analyze financial information from various companies that interest you in order to make investment decisions.
Ratio analysis is the analysis of financial information found in a company's financial statements. Such analysis can shed light on financial aspects that include risk, reward (profitability), solvency, and how well a company operates. As a tool for investors, ratio analysis can simplify the process of comparing the financial information of multiple companies. There are five basic types of financial ratios:
Some key ratios that investors use are the net profit margin and price-to-earnings (P/E) ratios. Net profit margin, often referred to simply as profit margin or the bottom line, is a ratio that investors use to compare the profitability of companies within the same sector. It measures the amount of net profit (gross profit minus expenses) earned from sales. It's calculated by dividing a company's net income by its revenues. Instead of dissecting financial statements to compare how profitable companies are, an investor can use this ratio instead. For example, suppose company ABC and company DEF are in the same sector. They have profit margins of 50% and 10%, respectively. An investor can easily compare the two companies and conclude that ABC converted 50% of its revenues into profits, while DEF only converted 10%.
One metric alone will not give a complete and accurate picture of how well a company operates. For example, some analysts believe that the cash flow of a company is more important than the net profit margin ratio. Another ratio investors often use is the price-to-earnings ratio. This is a valuation ratio that compares a company's current share price to its earnings per share. It measures how buyers and sellers price the stock per $1 of earnings. The P/E ratio gives an investor an easy way to compare one company's earnings with those of other companies. Using the companies from the above example, suppose ABC has a P/E ratio of 100, while DEF has a P/E ratio of 10. An investor can conclude that investors are willing to pay $100 per $1 of earnings that ABC generates and only $10 per $1 of earnings that DEF generates.
A high P/E ratio can indicate that a company's stock is overvalued or that investors may be expecting high future earnings growth. A low P/E ratio can indicate that a stock is undervalued or that future earnings are in doubt. As mentioned, it's important to take into account a variety of financial data and other factors when doing research on a possible investment.
Ratio analysis includes these five types of financial ratios: profitability ratios, liquidity ratios, debt or leverage ratios, operations ratios, and market ratios.
Start by choosing companies in the same industry. Narrow this down to companies with similar products, inventory methods, business longevity, and location. Then, compare the same financial ratios for both. Consider looking at a big picture of results over time rather than just one year-end snapshot.
Company information is available in many places, including news and financial publications and websites. However, to be sure of its credibility, look for financial information in audited company annual reports. In addition, the Securities and Exchange Commission (SEC) maintains financial and business information about publicly held companies in the online database called EDGAR. Access is free of charge. |
Comparative analysis of two companies
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