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Q: Why is it important to remember that financial ratios can differ from industry to industry? Give an example of this.
A: It's basically because you need to keep things in context. You can't compare apples and oranges, to use a phrase. For example, airlines generally have a lot of liabilities in the form of bonds (debt financing). [ Supermarket chains don't generally use debt financing as a means to raise capital. Financial ratios or indexes are used to evaluate a firm's or an industry's financial condition. Often
they are used to judge the investment suitability of a particular company. One firm's ratios can be compared to its own past performance and/or to the performance of the industry as a whole. Financial ratios are calculated from the figures given in the firm's annual financial statement. Those kind of differences make ratio comparisons meaningless between different industries. ]
Expert answered|selymi|Points 1812|
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Asked 3/31/2011 7:54:12 AM
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