From the course: Accounting Foundations

Comparing across companies

From the course: Accounting Foundations

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Comparing across companies

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- A number by itself don't mean much. For example, a company reports a return on sales of 10%. Is that good or bad, up or down? Hard to tell. If the company's in the grocery business, a 10% return on sales would be amazing. In a tech sector company, disappointing. Well, as we saw previously, target reported a return on sales in 2024 of 3.9%. We also saw that they reported a return on sales the previous year of 2.6%. So in that context, 3.9% looks pretty good. But how are other companies in the same industry doing? It's helpful not only to look across time for the same company, but also to look across companies at the same point in time. Now, one word of caution here. When comparing across companies at the same time, it's beneficial to make comparisons within the same industry. It does little good to compare an airline company with a retail clothing company. That's apples and oranges. BMW reported a return on sales in 2023 of 7.3%. General Motors reported a return on sales of 4.2%. For Ford, 3.2%. GM looks pretty good compared to Ford, but not so good when compared to BMW. Now we can start to ask questions. What is BMW doing with its expenses to make it so much more profitable than these other companies? Where did things go south for Ford? Comparable financial statement data allow us to start answering these questions. But comparing Ford's 3.2% return on sales to Microsoft's 36%, or Apple's 24%, that's not very meaningful. When comparing across companies, remember to keep the comparisons within the same industry. All of the analysis techniques we're about to discuss, common size statements, ratio analysis, DuPont framework, they're most valuable when trends are analyzed. What changes are being made from year to year? What changes are being made by competitors? This information can be teased out of the financial statements through a very careful analysis of the numbers contained in the financial statements. Be careful, be cautious, and be prepared to see what others cannot. Financial statement analysis is about to introduce you to a whole new world.

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