Companies’ financial indicators are a powerful tool for obtaining up-to-date information about the liquidity, success, relevance, and prospects of the selected company, but many of them can only be interpreted in comparison. Although often comparing the performance of companies from the same industry, one can get a complete and adequate picture; there are cases in which this kind of information will not clarify the situation.
Firstly, financial indicators reflect only the result of the company’s activities, poorly representing its processes. Processes can include effective human resource management, maintaining social and environmental responsibility to enhance the company’s reputation, acquisitions, mergers, and other changes in the organization’s structure (Matar & Eneizan, 2018). Each of the listed factors can affect the need for expenses in a different way for the future, which is why the actual picture of the company’s development will be insufficient to build ratios. Ideally, the history of the company, its reputation, and strengths and weaknesses should also be considered, and therefore, to build an adequate comparison of the two companies, a PESTLE and SWOT analysis will be required.
Second, different accounting methods also have different effects on the bottom line. Companies can work in the same industry, but the disposal of funds can be diametrically opposite from the expenditure of funds that came first to funds that came last. As an example, for the first case, it is possible to offer Facebook and TikTok – while the former is constantly investing in the development of new technologies in various directions, the latter is focused on its application and has good profit margins. Consequently, it is hard to claim that TikTok has a better outlook than Facebook – assessing the future is not limited to just these metrics.
Reference
Matar, A., & Eneizan, B. M. (2018). Determinants of financial performance in the industrial firms: Evidence from Jordan. Asian Journal of Agricultural Extension, Economics & Sociology, 1-10.