Ratio Analysis: Beyond Interpretations

Friends, we know that Ratio Analysis is one of the most important part of assessing the business, but taking the idea to the next level I guess, that calculating all ratios for all the company wouldn’t make sense. Say eg.For highly capital intensive industry we should not rely upon EBITDA Margin, as that would ignore the depreciation figure which is pretty high in such industry.

Now when I go through internet on text “How to identify and assess competitive advantage (economic moat) of the company with the ratio analysis” , most of the writers have generalized the list of ratios without correlating them with the specific characteristics of the industry.

I would request you people to come up with some ideas in this regard.

Eg.I think we should categorise the ratio interpretation in three parts.
1.Ratios that have different implications for different industry. Such ratios that should not be used for inter-industry comparisons.(Eg.As I mentioned we should never compare EBITDA margin of capital intensive Industry with that of the trading industry, that would lead to crazy results).

2.Industry Specific Ratios-Certain Ratios that are only meant for certain type of industries only.(Eg.Inventory turnover ratio would have as such no implications for service industry, whereas for FMCG Industry it says a lot. So calculating that ratio for service industry would add no/less value and against calculating that for FMCG industry.)

3.All Weather Ratios- Ratios those always have something to say irrespective of industry or company-(eg.RoE, Debt to Equity etc.)

I would like you to take the discussion further.

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