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Most of the information is self-explanatory. Interest Coverage ratio is the same as the Times Interest Earned ratio discussed in the text. The abbreviation MRQ refers to results from the most recent quarterly financial statements, and TTM refers to results covering the previous ("trailing") 12 months. This site also provides a comparison to the industry, business sector, and S&P 500 average for the ratios. Other ratios available on the site have five-year averages calculated. Have a look!

Ross et al.: Fundamentals II. Financial Statements 3. Working with Financial © The McGraw-Hill of Corporate Finance, Sixth and Long-Term Financial Statements Companies, 2002

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82 PART TWO Financial Statements and Long-Term Financial Planning

One particularly severe problem is that many firms are conglomerates, owning more-or-less unrelated lines of business. The consolidated financial statements for such firms don't really fit any neat industry category. Going back to department stores, for example, Sears has an SIC code of 6710 (Holding Offices) because of its diverse financial and retailing operations. More generally, the kind of peer group analysis we have been describing is going to work best when the firms are strictly in the same line of business, the industry is competitive, and there is only one way of operating.

Another problem that is becoming increasingly common is that major competitors and natural peer group members in an industry may be scattered around the globe. The automobile industry is an obvious example. The problem here is that financial statements from outside the United States do not necessarily conform at all to GAAP. The existence of different standards and procedures makes it very difficult to compare financial statements across national borders.

Even companies that are clearly in the same line of business may not be comparable. For example, electric utilities engaged primarily in power generation are all classified in the same group (SIC 4911). This group is often thought to be relatively homogeneous. However, most utilities operate as regulated monopolies, so they don't compete very much with each other, at least not historically. Many have stockholders, and many are organized as cooperatives with no stockholders. There are several different ways of generating power, ranging from hydroelectric to nuclear, so the operating activities of these utilities can differ quite a bit. Finally, profitability is strongly affected by regulatory environment, so utilities in different locations can be very similar but show very different profits.

Several other general problems frequently crop up. First, different firms use different accounting procedures—for inventory, for example. This makes it difficult to compare statements. Second, different firms end their fiscal years at different times. For firms in seasonal businesses (such as a retailer with a large Christmas season), this can lead to difficulties in comparing balance sheets because of fluctuations in accounts during the year. Finally, for any particular firm, unusual or transient events, such as a one-time profit from an asset sale, may affect financial performance. In comparing firms, such events can give misleading signals.

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