Discuss five limitations to ratio analysis
What will be an ideal response?
There are six limitations discussed in the text:
1. Industry identification is difficult.
2. Industry averages are only approximations.
3. Accounting practices differ widely among firms.
4. Financial ratios can be too high or too low (e.g. current ratio).
5. The industry average may not be ideal.
6. Seasonality in firm operations causes ratios to vary with seasons.
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Which of the following investments has a larger future value: A $100 investment earning 10% per year for 5 years or a $100 investment earning 5% per year for 10 years?
A) An investment of $100 invested at 10% per year for 5 years because it has a future value of $161.05. B) An investment of $100 invested at 10% per year for 5 years because it has a future value of $162.89. C) An investment of $100 invested at 5% per year for 10 years because it has a future value of $161.05. D) An investment of $100 invested at 5% per year for 10 years because it has a future value of $162.89.
Which of the following is a major duty of a financial manager?
I. To make investment decisions II. To make financing decisions III. To manage cash flow from operating activities A) I only B) I and II only C) I and III only D) all of the above