Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Textbook Question
Chapter 7, Problem 6Q
Why is it sometimes misleading to compare a company’s financial ratios with those of other firms that operate in the same industry?
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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 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?
Chapter 7 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 7 - Define each of the following terms:
Liquidity...Ch. 7 - Financial ratio analysis is conducted by managers,...Ch. 7 - Prob. 3QCh. 7 - Profit margins and turnover ratios vary from one...Ch. 7 - How might (a) seasonal factors and (b) different...Ch. 7 - Why is it sometimes misleading to compare a...Ch. 7 - Greene Sisters has a DSO of 20 days. The companys...Ch. 7 - Vigo Vacations has $200 million in total assets,...Ch. 7 - Winston Watch’s stock price is $75 per share....Ch. 7 - Reno Revolvere has an EPS of $1.50, a cash flow...
Ch. 7 - Needham Pharmaceuticals has a profit margin of 3%...Ch. 7 - Prob. 6PCh. 7 - Ace Industries has current assets equal to 3...Ch. 7 - The Morrit Corporation has $600,000 of debt...Ch. 7 - The Kretovich Company had a quick ratio of 1.4, a...Ch. 7 - Data for Lozano Chip Company and its industry...Ch. 7 - Prob. 14PCh. 7 - Why are ratios useful? What three groups use ratio...Ch. 7 - Prob. 2MCCh. 7 - Calculate the 2019 inventory turnover, days sales...Ch. 7 - Calculate the 2019 debt ratio,...Ch. 7 - Prob. 5MCCh. 7 - Prob. 8MCCh. 7 - Prob. 9MCCh. 7 - What are some qualitative factors that analysts...
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- What is the value of common-sizing analysis? Why would a company do such an analysis on another company’s financial statements?arrow_forwardWhat 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.arrow_forwardTo 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?arrow_forward
- What is the usefulness of using Ratio analysis in financial reporting? What is industry average? How it benefits?arrow_forwardWhat are the benefits of comparing a firm’s current financial information withinformation for previous accounting periods, with industry averages, and withfinancial information for competitors?arrow_forwardWhat is the primary difference between the two methods for disaggregating ROE and how does each method inform the analysis of a company’s financial performance?arrow_forward
- What is earnings quality? What are the possible topics or areas that the reported earnings may not best represent the earnings reality or the future operating potential of a company?arrow_forwardExplain why balance sheet accounts are generally “averaged” and income statement figures are just lifted from the income statement when using them as factors in a particular financial statement ratio? How do the DuPont technique helps the firm’s managers to further analyze its returns?arrow_forwardIn comparing the current ratios of two companies, why is it invalid to assume that the company with the higher current ratio is the better company? a. The two companies may be different sizes. b. A high current ratio may indicate inadequate inventory on hand. c. The two companies may define working capital in different terms. d. A high current ratio may indicate inefficient use of various assets and liabilities. could you explain this questionarrow_forward
- Which financial ratios would you recommend to evaluate a company's solvency? Once these ratios are computed, what do you recommend comparing them to?arrow_forwardWhy would managers misrepresent the financial results oftheir companies?arrow_forwardPlease see the attached graph for questions below. What is the difference between the two companies on this ratio? What is a plausible explanation as to why they would differ? Is one company clearly different than the other? Are there economic or end-market influences that explain why the ratios differ? What might they be? Over time, is each company’s overall financial performance improving, declining, or is something strange going on? Do you think evaluating financial statements is a good idea? What do you regard as some of the shortcomings of financial ratio analysis?arrow_forward
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