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why is it sometimes misleading to compare a company's financial ratios with those of other firms that operate in the same industry.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter7: Analysis Of Financial Statements

Section: Chapter Questions

Problem 6Q: Why is it sometimes misleading to compare a company’s financial ratios with those of other firms...

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What are the Limitations of Financial Ratios in Business Decisions?
Which is not a potential problem of utilizing ratio analysis? A. trends and industry averages are historical in nature. B. financial data may be distorted due to price-level changes. C. firms within an industry may not use similar accounting methods. D. all of the above E. answer not given
Explain the Limitations of Financial Ratios in Business Decisions?
What are the limitations to using financial ratio analysis [such as profitability ratios, liquidity ratios, gearing ratios, and investment ratios] computed from the financial statements of a company. What other alternatives could have been used to decide on the performance and investment-worthiness of a company.
What is the basic purpose for examining trends in a company’s financial ratios and other data? What other kinds of comparisons might an analyst make?
What is the value of common-sizing analysis? Why would a company do such an analysis on another company’s financial statements?
When you are interpreting financial ratios, it is useful to compare a company's ratios to some form of standard. Group of answer choices True False
No single ratio can predict the success or Failure of a company. What different types of Ratios are necessary for financial analysis? How is the Return on Assets (ROA) Ratio Calculated?
What kinds of limitations exist in analyzing a company just by reading its financial reports?
What is the overall purpose of financial ratios? What is their use relative to the economy, the firm’s industry, the firm’s main competitors, and the firm’s past relative ratios.
20. Which of the following factor does not affect a company's financial ratios? Select one: a. Aggressive revenue recognition practices. b. Accounting for similar economic fundamentals in a similar fashion c. The timing of asset purchases. d. The presence of nonrecurring items among the firms being analysed.
To evaluate a company’s performance, investors need a benchmark to which they can compare its financial ratios. What are some of the problems associated with these comparisons?