The analysis of industry norms in comparison with the relative performance of organizations in the same industry:
The performance of one firm is compared to some selected firms in the same industry at the same point in time. This kind of comparison is known as cross-sectional analysis.
In most cases, it is more useful t compare ratios with the ratios of a few selected competitors, who have similar operations. This kind of comparison indicates the relative financial position and performance of the firm. A firm can easily resort to such a comparison as it is easy to get published financial statements of the similar firm.
A cross sectional analysis assists a firm to identify its key success factors and its weaknesses vis a vis its major competitors and the industry.
To ascertain the relative financial standing of a firm, its financial ratios are compared with a competitor. Taking the market shares of the firms into consideration, ratios such as Return on Investment and Return on Equity are computed to get the relative standing of a firm. The procedure is relatively simple as it entails collecting data of the firms just for a specific year.
It is worth noting that ratios will be more reliable when trends in time are analyzed. Ratios at a point in time can mislead the analyst because they may be high or low for some exceptional circumstances at that point in time. An impressive financial position may rapidly erode over time while a weak position may be steadily improving.