Reference no: EM132784597

1. Financial statements are of vital importance for a company because they provide information for the overall performance of the company. The process of analyzing the financial statements will not only provide a picture of its performance but will also provide information on how well or poorly the company is performing compared with other similar companies in the industry. That is why it is very important to look at the industry where the company is in and look at the industry's overall performance so that we have a big picture in mind when we look at the performance of each individual companies. As we know that when we conduct financial statements analysis, we will be looking at a bunch of ratios, such as the profitability ratios, the liquidity ratios, the activity ratios, financing ratios and market ratios. Only when we compare these ratios of a company with the ratios of the industry can we get a better picture of where the company stands. For example, if a company is in the grocery business and its profit ratio is 4.7%, This may not seem to be a good margin of profit. But when compared with the overall grocery industry of 3.5% profit ratio, we can see that the company is actually doing pretty good in business.

2. Industry plays an important role in evaluating the financial statements. It's a tool to analyst the competitive dynamics of an industry and improve our business strategy. The purpose of the financial statement is to make the right decision to raise the business value and financial performance. If we only look at our financial statement, we will not be able to tell what we are missing on our end. For example, every quarter, company A is beating their earning expectation which is great. However, compare with other companies in the same industry, company revenue is not that great. It can be their quality product, the marketing strategy, or their service,... So, industry analysis is the first step of financial statement analysis.