What are the significant assumptions we make while comparing financial ratio of various companies in the same industry?
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The significant assumption we make while comparing the financial ratio of various companies in the same industry is comps. ( Comparable company analyses ).
It is the technique used in valuing the company just by comparing to the company's evaluation multiples to them of its squint. The simple supposition is that the companies with same features should commerce at same multiples.
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The significant assumption we make while comparing the financial ratio of various companies in the same industry is through the process of comparable company analysis. The method used to value a company by comparing that company’s valuation multiples to those of the others in the industry.
Explanation:
- The analysts compare a company's financial ratios to industry averages using different subscription-based online tools.
- The companies are compared on the basis of companies with similar characteristics with the same valuation.
- The analysts make use of the available data and statistics for the reviewing companies and calculate the various multiples.
- The financial ratios can differ from one industry to another since there are some industries that take on much more debt than others and they may end up earning lesser profits in comparison to the others.
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