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What is the Purpose of Inter-Firm Comparisons?
What is Inter-Firm Comparisons?
Financial ratios can be compared with one another in order to get a gist of the performance and other attributes of a company in relation to the other major firms. Such a performance of a company that shows the financial ratios is known as Cross-Sectional Analysis or Inter-Firm Comparison.
In an Inter-Firm Comparison chart, various attributes such as Market Share, Return on Equity (ROE), Net Worth (NW), Capital Employed (CE), Net Sales (NS), Profit Before Interest and Taxes (PBIT), etc., are put in one table. This table helps one to see the performance and efficiency of one company in comparison to others. That is why the inter-firm comparison is useful for investors as well as analysts.
Similarity with Comparative Financial Statement
An inter-firm comparison table is similar to a Comparative Financial Statement with the only difference being the number of attributes being from the same time period for the former and from different time periods in the latter.
Also, the comparative financial statement puts data of two or more financial years side by side in order to see trends. In the case of inter-firm analysis, there are many attributes which are placed side by side to check the performance within a single period of operation.
Purpose of Inter-Firm Comparisons
Investors and Analysts use Inter-Firm Comparisons to fulfil the following purposes −
Resource Allocation to Increase Profitability
Every company wants to know their status vis-a-vis their competitors and industry average to see whether their business is running on the right path. An inter-firm comparison table can be an unavoidable tool for such circumstances. Such a comparison not only reveals the weaker areas but also shows when and where to focus one's resources in order to increase profitability along with growth.
Availability of Various Ratio Data
When data of various ratios and items are placed in one table, it becomes easier for the investors and analysts to check the details and make an informed decision. Company managers, on the other hand, can see the problem areas and take corrective measures to avoid problems that may arise in the future. An inter-form comparison, thus, helps businesses make informed decisions in the right course of time too.
To Check Financial Health of Company
An inter-firm comparison also helps businesses to see whether their company is in sync with the industry average to check the financial health of their company.
If the company is performing below an industry average, the management or operations are considered as the culprits. An inter-company comparison helps companies identify the real issues plaguing the operations so that the company can skip a potential hiccup in the future. It helps companies to understand their own behavior through the comparative chart that shows various financial ratios.
Shows Company's Own Achievements and Failures
The best way to use inter-company comparison is to do this with an intracompany comparison that shows the company's own achievements and failures. When an intra-company comparison is done, one can easily see the corrective measures that must be taken to rectify the business errors. The attributes that create bottlenecks can also be magnified by an intercompany comparison.
Therefore, by optimally using an intra-company chart, the businesses can pave a smoother path for their businesses.
To Keep the Business at Competitive Edge
An inter-company comparison is also a better way to keep the business competitive by removing focus from stronger areas, and bringing it to attributes that need immediate attention. It is like an X-Ray for the heart of the business that will keep hardships away in the future.
Conclusion
The purpose of the inter-company comparison is to reveal the weak and strong attributes of a company according to the industry average or in comparison to competitors in the same industry. The inter-company analysis reveals in which performance areas the company is weaker which is then put in an easily observable pattern for the stakeholders to understand the various attributes of the company they are related with.
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