Ratios are useful for analyzing and comparing company performance for at least four different reasons: -
Standardization
Flexibility
Focus
Evaluation
You can standardize the companies' net incomes by - dividing both by the total sales of those
companies. This will help you to see how much inc...
- D076 UNIT 4 Finance Skills for
Managers QUIZ
Ratios are useful for analyzing and comparing company performance for at least four different reasons: -
✔✔Standardization
Flexibility
Focus
Evaluation
You can standardize the companies' net incomes by - ✔✔dividing both by the total sales of those
companies. This will help you to see how much income in percentage terms was earned from the total
sales made during the year.
Standardization - ✔✔ratios standardize financial data, thus making it comparable across firms—even
those of distinctly different sizes.
Flexibility - ✔✔you can create new ratios to meet your needs
Evaluation - ✔✔whether the firm is achieving its stated goal to maximize shareholder wealth
Focus - ✔✔help you know what to focus on and help you evaluate the performance of a firm
benchmarking - ✔✔The process of completing a financial analysis and comparing a firm's performance
to that of other similar firms
There are three main comparison methods used in ratio analysis: - ✔✔trend analysis, cross-sectional
analysis, and progress measurement.These methods help you use ratios to analyze the financial
performance of a business.
, trend analysis - ✔✔looks at a firm's financial ratios over time
Trend analysis time series generally look backward.... - ✔✔five years and forecast forward three years
total asset turnover - ✔✔It calculates how well a firm is using its assets to generate sales, which you
will define as sales over total assets
cross-sectional analysis - ✔✔compares a firm's financial ratios with those of a peer group.compares the
firm to a cross-section of its peers, its competitors, its industry, or even the market in general and tells
the analyst something about the target firm's relative strength (or weakness) and performance
progress and achieve goals - ✔✔is critical for firms to stay competitive in today's global market.
Remember what the old proverb says: "Where there is no vision, the people perish."
There are two types of firms in which data timing could be problematic: - ✔✔seasonal firms and high-
growth firms.
Seasonal firms - ✔✔those that have high sales during one part of the year and low sales during another
part of the year.
Ratios themselves are not useful, but through comparisons such as trend analysis, cross-sectional
analysis, and progress measurement, they - ✔✔become meaningful
Which statement below is an example of how ratios are used in the field of finance? - ✔✔A firm's ratios
are compared with those of a benchmark peer group to determine the firm's relative strength and
performance.
Why are ratios considered flexible? - ✔✔Because they are not regulated and can be changed or
invented according to a firm's needs
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