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What purpose do industry average financial ratios serve?

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Quick Answer

Industry average financial ratios are benchmark or comparison tools to help a business gauge its own financial health and performance. When a business compares its debt leverage ratios to industry averages, for instance, company leaders get a sense as to whether they carry excessive debt relative to the norm.

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Full Answer

A primary reason for benchmarking against the industry average is that financial ratios vary significantly by industry. In some industries, profit margins are much greater than in others. Thus, some of the main indicators of good financial health are high profitability, asset efficiency and liquidity, and moderate leverage, relative to competitors within the industry.

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