It may be confusing to compare the financial ratio of a company of those of other firms in the same industry especially due to the different accounting methods used. Essentially, the accounting information utilized in computation of ratios is subject to estimates, assumptions as well as different accounting method adopted by firms. Moreover, the different in business cycles among various business operating in the same industry causes disparities in the accounting methods used. While some organizations operate in the inception stage, other corporations operate in the intermediate and maturity state depending on the experience and years of operation in the industry (Pratt, 2016). A perfect epitome would be a company which utilizes current ratios which puts more emphasis on current assets and liabilities instead of market value ratios. A firm which utilizes First in, First Out (FIFO) method in valuing inventory will surprisingly have a higher inventory value as compared to an accounting firm which utilizes LIFO (last in first out) method (Gitman, Juchau, & Flanagan, 2015).
Organizations operating in the growth stage record negative profits since they focus on investments of fixed assets while corporations operating in the maturity stage record positive profits. Attempting to compare the two companies will be erroneous since the company at the growth stage has a negative ROI, return on sales as well as profit margin ratio. On the other hand, the company at the maturity stage will have a positive ROI. According to Pratt (2016), the difference in the size of the business is also another factor given the fact that larger companies operate in a broader scope and are characterized with higher investment levels as compared to startups. Thus, comparing companies having different investment levels could be misleading.
One of the strategies would be to offer stocks to investors wishing to invest as well as offering discounts to the members and the referrals they bring to the company. Reaching out to companies which offer a discount to those employees as a wellness benefits could also be another strategy. Lastly, rendering three, six or twelve months agreement at varied price discounts for the longer period they join would also be a good idea. Angel investors can help raise funds without losing part of the company (Xing, Howe, Anderson & Yan, 2017). With the likes of Reid Hoffman for example invested in Facebook, Zynga and Flickr and was termed as an angel investor. When an organization offers stock to investors, it invests in a long term strategy which may help the business manage changes needed to growth the business.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.
Pratt, J. (2016). Financial accounting in an economic context. John Wiley & Sons.
U.S. Securities and Exchange Commission. (n.d). SEC Concept Release:International Accounting Standards. Retrieved from https://www.sec.gov/rules/concept/34-42430.htm
White, M. J (Jan 5, 2017). A U.S. Imperative: High-Quality, Globally Accepted Accounting Standards. Retrived from https://www.sec.gov/news/statement/white-2016-01-05.htmlXing, X., Howe, J. S., Anderson, R. I., & Yan, S. (2017). Labor Rights, Venture Capital, and Firm Performance. Financial Management, 46(1), 129-154.
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