“The typical experience of the speculator is one of temporary profit and ultimate loss.” – Benjamin Graham
Comparing one investment against another is impossible because no two companies are alike. Worse, many so-called sophisticated investors will compare companies in totally different industries. It is impossible to compare a restaurant based operation against an insurance company. Both have completely different operational models and financial balance sheets. It is rare for restaurants to have receivables, whereas insurance companies always allow their customers to pay premiums under payment plans. How do you compare liquidity ratios when the current assets’ matrix is so different between them?
Without the ability to compare potential investments, how does an investor know what is good and what is not so good when reviewing financial information? There must be some tool or set of tools to compare similar companies?
There is. Business ratios are used to compare similar companies within the same industry. RULE #1: DO NOT USE BUSINESS RATIOS TO COMPARE COMPANIES AGAINST EACH OTHER IF THEY ARE IN DIFFERENT INDUSTRIES.
Business ratios are not perfect, they have their respective flaws and