Ace the CMA 2026 Challenge – Unlock Your Accounting Superpowers!

Employing financial ratios is a strategic method for management to effectively compare performance to industry standards because these ratios provide quantifiable metrics that reflect a company's financial health and operational efficiency relative to its peers within the same industry. Financial ratios can include measures of profitability, liquidity, solvency, and efficiency, which are standardized and commonly used in benchmarking against industry averages.

For instance, profitability ratios like the return on equity (ROE) and net profit margin can be compared to similar figures from competing firms to assess how well a company is performing in generating profits relative to others. Likewise, liquidity ratios such as the current ratio and quick ratio help gauge a company’s ability to meet short-term obligations, providing critical insights when compared to industry benchmarks. This analysis allows management to identify strengths and weaknesses, make informed financial decisions, and implement strategies for improvement based on how they stand in relation to industry standards.

While budget forecasts can guide internal targets and expectations, they do not provide a broad view of how the company is performing relative to others in the industry. Assessing employee performance primarily focuses on individual contributions rather than overall financial standing compared to industry performance, and reviewing past year’s tax returns offers limited insight into current or comparative financial health.