I am doing a fundamental analysis for a indsutry and then comparing industry analysis with a company.?

My querry is:
1) I have taken randomly 5 firms form the industry. Now if i have to calculate profitablity or investment valuation ratios should i take the average of 5 firms or how to go about it?

Example:

Indsutry = Mock
Company = A, B, C, D & E.

Now to calculate Profit margin ratio

1) Should i take sum of net profit after tax of all the firms and divide by sum of Sales of all the firms?

or

2) Should i take average of net profit after tax of all the firms and divide by average of Sales of all the firms

First, you have to make sure these companies belong to the industry and one way to tell is by looking at the SIC codes (Standard Industries Classification) or some other standard. Next, you want to make sure these are what we call "pure-plays," i.e. companies that derive it's revenues and earnings in that industry. If you have a company that is involved in two or more different industries, it would be tough akin to comparing apples to oranges.

Next, you have to make sure all these companies use the same accounting treatments; if not, then you have to normalized the financial results so you can have an apples to apples comparison.

As for the profit margin ratio, the ratio is simply net income divided by sales. For each company, you would calculate this ratio (again make sure the accounting treatment is equalized for all the firms) and that would be the ratio for each of the five companies, respectively. For the industry ratio, it would be the simple average of these ratios from the five companies.

Good luck.