What are Industry Ratios?

Malcolm Tatum
Malcolm Tatum

Industry ratios are one of several different types of financial ratios that are used to make comparisons between like items, usually for the purposes of determining the current stability of a business in relation to its competitors. Investors often find that industry ratios are helpful in assessing the potential of different businesses in terms of investing, since calculating the ratios involves measuring the profitability and the efficiency of the general operation in comparison to what else is going on in that same industry. Determining the ratio requires gathering industry data and properly analyzing those statistics so that comparisons between companies within the same industry are uniform and the resulting data is actually meaningful.

Industry ratios refer to the comparison of financial ratios of similar items to determine performance against competition.
Industry ratios refer to the comparison of financial ratios of similar items to determine performance against competition.

Within the scope of industry ratios, there are a number of factors to consider. One has to do with identifying the growth potential of one or more companies within a given industry. This often requires assessing factors such as the past performance of the companies in similar periods, such as the same quarter one, two, or even five years previous. Doing so helps to provide some insight into how the industry itself is changing and growing, and what percentage of that growth the companies under consideration have contributed to the process.

Within the scope of industry ratios, consideration of asset management is also important. Here, the goal is to understand what each company under consideration is doing with the resources they have on hand. This means the overall management, from the purchase of raw materials to keeping waste in the production process as low as possible. By applying industry standards in this area to a specific situation, it is possible to see how it measures up overall, and possibly aid the investor in determining if that particular company is worth pursuing as an investment.

The process of asset management also includes consideration of debt management. Again, the industry ratios of the companies under consideration should indicate a positive comparison with the industry standard, indicating that the companies are managing and retiring debt in a manner that inspires confidence within the industry and with investors in general. A company that does not compare favorably with the industry ratios of other competitors in terms of asset management will likely be considered somewhat of a risk, and an investment to avoid.

As with any type of comparison, industry ratios are only as good as the data used to make the assessments. This means that before taking any ratio at face value, it is important to verify the information used to arrive at that ratio. Assuming all information is current and correct, industry ratios can provide important data that companies can use to improve their situations, or that investors can use when considering whether or not to buy stock issued by a given company.

Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including wiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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