Industry standards

To overcome some of the limitations discussed, it’s possible to compare against ‘industry norms’. These are average figures for similar companies within an industry sector. These companies should be a good comparison as they operate within the same bounds and typically access the same type of suppliers and customers. Industry data can also smooth out differences due to industry trends, which all organisations operating in that sector will have been exposed to, to some extent. This smoothing out makes comparisons more relevant. Furthermore, standard interpretation of many ratios can be incorrect when applied within certain sectors. For example, a web-based company may have few real assets and so asset ratios could be seen as weak against normal standards, but strong against an industry norm.

You can find the industry norms for some ratios from organisations who provide databases of financial information (see the website in Supporting resources for one of them).