MANAGEMENT

Detailed explanation-1: -One of the most effective ways to compare two businesses is to perform a ratio analysis on each company’s financial statements. A ratio analysis looks at various numbers in the financial statements such as net profit or total expenses to arrive at a relationship between each number.

Detailed explanation-2: -Financial Statements May Not Be Comparable If a user wants to compare the results of different companies, their financial statements are not always comparable, because the entities use different accounting practices. These issues can be located by examining the disclosures that accompany the financial statements.

Detailed explanation-3: -The results of such comparisons can mean more powerful decision-making when it comes to selecting companies in which to invest. It’s important that investors understand that a single ratio from just one company can’t give them a reliable idea of a company’s current performance or potential for future financial success.

Detailed explanation-4: -Comparing financial ratios of companies within the same industry may be misleading because some companies may have investments in other industries that could distort the comparison. An example of this would be comparing Facebook and Twitter’s financial ratios.