Accounting and Finance Foundations

Unit 11

Accounting and Finance Foundations Unit 11: Financial Analysis 828

Financial Analysis

Chapter 23

Industry Comparison

Comparing your company’s results with industry standards or averages is a good way to determine how

well a particular company is actually performing. In this analysis, certain ratios from the income statement

(including the gross margin ratio, total expenses, and net income—all expressed as percentages) are com-

pared to the average ratios for other companies that are in the same business or industry.

These average ratios, often referred to as industry standards, are available from many business-statistic

reporting resources. This type of comparison can help managers determine whether their business is per-

forming above or below the average for the industry.

A common ratio used to compare your company to others in the industry is the gross margin ratio. An

indication of profitability, the gross margin ratio is the ratio of gross profit to revenue. A high gross margin

ratio signals that a good proportion of sales are being converted into gross profit.

Gross Margin (%) = Gross Profit / Revenue

Industry Standard Comparison

Industry My Business Acceptable

Standard Actual Result Recommended Action

Component Percentage Percentage Yes No If Needed

Cost of Merchandise Sold No more 55.3% X Reduce Purchases $

than 50%

Gross Profit on Sales No less 44.7% X Increase Sales and/or

than 50% Reduce Purchases $

Total Operating Expenses No more 31.3% X

than 35 %

Net Income No less 13.4% X Increase Sales, Reduce

than 15 % CGS or Reduce Expenses

Lesson 23.3 Key Performance Indicators &

Industry Comparison (cont’d)

Student Guide