What Is Comparative Ratio Analysis? Overview, Role, 7 Facts

Comparative Ratio Analysis (CRA) is a method that allows you to see which areas of your site are performing best and which ones need work. You can use this to help identify where you should focus your efforts for growth.

What Is Comparative Ratio Analysis?

Comparative ratio analysis is commonly used by businesses to assess their financial health. Despite being based on financial data, the ratios can provide insight on operational elements such as profitability, asset utilization, and leverage.

What Is Comparative Ratio Analysis?

Purpose Of Comparative Ratio Analysis

The vast majority of these investigations are carried out for the goal of benchmarking. For example, a company may monitor its financial leverage over the course of a year or several months to determine if it is higher or lower than in the past.

Managers may also be assessed based on financial metrics that demonstrate the efficiency with which their divisions utilise corporate resources.

How To Comparative Ratio Analysis

Profitability, liquidity, financial leverage, and asset turnover are just a few of the categories into which a company’s data is often classified at the start of a research project. The ratios assess performance in numerous areas based on accounting data.

Each part discusses the company’s liquidity, debt use, profitability of various goods and product lines, asset utilization, and debt profitability.

What Is Comparative Ratio Analysis?

Accountants are sometimes charged with creating the ratios for use in the research as objective third parties. This information can then be used by owners and executives for additional study and comparison.

Reports That Detail A Company’s Comparative Ratio Analysis

There is no set format for reporting a company’s comparative ratio analysis. Despite the name “financial ratios,” these metrics are frequently employed solely within a corporation and by a small set of stakeholders.

This implies that the report can be given in whichever format is most beneficial to the report’s target audience, whether it be owners, executives, or managers.

The only guideline, as previously stated, is to categorize ratios into their corresponding groups. Any ranking or order of priority is determined solely by the company’s needs and requirements.

What Is Comparative Ratio Analysis?

Major Use Of a Comparative Ratio Analysis

A comparative ratio analysis is utilized for trend analysis in its most basic form. An accountant will collect data from several months and organize it by month and year. Readers of the report can assess progress by comparing the baseline ratios in the report to their current levels.

Decreases in current and quick ratios, for example, may indicate a rising difficulty in meeting such obligations. If your current or quick ratios are falling, a glance at your profitability ratios may assist explain why.

Roles Of Comparative Ratio Analysis

Business owners and executives can assess their own company’s performance by comparing it to another firm operating under comparable economic conditions.

Companies that fall behind their competitors typically have major issues. Comparative ratio analysis often avoids the need to examine how alternative accounting processes could effect a company’s earnings, resulting in a more basic assessment of financial health.

What Is Comparative Ratio Analysis?

How to Calculate aComparative Ratio Analysis

In computing a person’s compa-ratio, the denominator is the median of a particular salary range. When the compa-ratio is 1.0, the employee’s wage is in the center of the range; when it is more or lower, it indicates how much or how little they are paid in contrast to the median.

If the median salary in a certain range is $27,000 and an employee receives $25,000, their pay is 94% of the median (($25,000)/($27,000) =.94, or 94% of the median).

But what does the employee’s compa-ratio of.94 tell us about their pay? Is this the appropriate ratio for this person?

The answer is dependent on the context in which this data is being utilized and the pay bands being compared. Here are some examples of salary assessments that you may use with a compa-ratio to examine how your institution’s compensation compares to others.

Assessing Individual Progression Through a Pay Range

A compensation ratio is frequently used to determine the optimum wage range for a certain employee. To set remuneration for distinct positions, many firms utilize a pay scale with a minimum, maximum, and intermediate point.

What Is Comparative Ratio Analysis?

Compensation objectives for a certain level are frequently specified within a range ranging from 80% to 120% of the median value. A typical compensation range would be as follows: 80% for new or inexperienced employees, 100% for the best and longest-serving employees, and 120% for the very best and longest-serving employees.

In certain circumstances, an employee’s performance determines how high up the pay range he or she will go. The University of Missouri System, for example, provides instructions on how to link performance ratings to compa-ratios for determining merit pay increments.

A compa-ratio may be used to examine how merit increases are distributed by dividing an employee’s increase rate by the unit’s average rise rate. Those that frequently outperform on evaluations should be rewarded with a greater compa-ratio.

Benchmarking Your Institution’s Salaries Against Market Salaries

Compa-ratios are beneficial because they allow you to compare individual earnings to acceptable market data-based benchmarks without the need for a pay range.

To understand how your institution’s remuneration compares to others in its classification or affiliation, compare the salary of your chief compliance officer, for example, to the median wage for institutions in that job.

What Is Comparative Ratio Analysis?

Do you need to rethink your compensation structure in order to maintain a competitive wage range? Low compa-ratios relative to the market can be used to identify occupations where your institution is paying much higher salaries than necessary, or to highlight inadequate compensation as a contributing factor for high turnover.

Identifying Areas of Inequity

Why should compensation be limited to workers’ wages? Compa-ratios can be used to compare salaries for an entire group in addition to comparing compensation for a single post.

Compa-ratios for groups of employees can be determined in the same manner that they are for individuals by dividing the average pay of one group by the average pay of the larger category of employees.

The only limitations are your creativity and drive. If so, does one campus department pay its administrative personnel less than another for essentially the same work? Is there a gender or racial/ethnic pay disparity within a certain position or set of pay grades?

What Is Comparative Ratio Analysis?

Group-level compa-ratios can be a quick way to evaluate if more in-depth study into potentially problematic areas is required, but they won’t tell you everything about why a group of persons could be paid differently.

A Tool in Your Toolbox

Some of the ways in which compa-ratios might help you evaluate your institution’s compensation structure are shown below.

When combined with other common compensation indicators, compa-ratios can play an essential role in the continual review and improvement of your compensation plan and procedures.

Conclusion

Comparable Ratio Analysis is a tool used by marketers and financial institutions to analyze a company’s value based on its financial performance. The idea behind Comparable Ratio Analysis is to determine how the company is valued.

For example, the ratio of earnings per share to book value per share is a good indicator of the price of the company.

Comparable Ratio Analysis works best when it uses actual financial data from the company in question. The ratio can then be adjusted to account for differences between companies like different accounting methods and debt levels.

One of the biggest drawbacks to Comparable Ratio Analysis is that it assumes that all companies are alike. There are many factors that make one company different than another. These include

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