Understanding Financial Analysis
Efforts at Understanding Financial Analysis can lead to conflicting conclusions derived from identical facts. Comparing gross profit with the industry average could raise questions.
If the company were more competitive in its pricing, could it capture a larger market share? A reasonable answer to this question would depend upon thorough knowledge of their operations and the experience of their sales personnel in dealing with specific customers.
On the other hand, if their gross profit percentage is below that of the industry, a number of other questions would be raised, such as the following:
- Are they purchasing at prices that are too high to provide an adequate gross profit?
- Is their pricing structure so low that adequate gross profit margins cannot be attained?
- Are salesmen too quick to cut prices?
- Is their marketing effort too heavily concentrated in those product lines that offer a relatively low gross profit percentage?
- Is their marketing effort directed toward those high-volume accounts that are so highly competitive that gross profit must be trimmed to an unrealistically low level?