A firm's financial position should not be analyzed in isolation. Important reference points are needed. Discuss how historical comparisons, comparisons with industry norms, and comparisons with key competitors can be used to make financial analysis more meaningful.
What will be an ideal response?
The financial position of a firm should not be analyzed in isolation. Important reference points are needed. Some issues that must be taken into account to make financial analysis more meaningful include historical comparisons, comparisons with industry norms, and comparisons with key competitors. In evaluating the financial performance of a firm, it is very useful to compare its financial position over time. This provides a means of evaluating trends. When evaluating the financial performance of the firm, it is important also to compare it with industry norms. The current ratio or profitability of a firm may appear impressive at first glance. However, it may pale when compared with industry standards or norms. Valuable insights can be gained into the financial and competitive position of a firm, if comparisons are made between a firm and its most direct rivals.
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