4 Reasons Ratios are Useful - 1 - Standardization
2 - Flexibility
3 - Focus
4 - Evaluation
Benchmarking - The process of completing a financial analysis and comparing a firm's performance
to that of other similar firms.
Trend Analysis - Comparing a firm's ratios across time
Cross-Sectional A...
D076 - Finance Skills for Managers Unit
4
4 Reasons Ratios are Useful - ✔✔1 - Standardization
2 - Flexibility
3 - Focus
4 - Evaluation
Benchmarking - ✔✔The process of completing a financial analysis and comparing a firm's performance
to that of other similar firms.
Trend Analysis - ✔✔Comparing a firm's ratios across time
Cross-Sectional Analysis - ✔✔Compares a firm's financial ratios to other firms' ratios or industry
averages
Seasonal Firms - ✔✔Firms whose performance varies according to the season.
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.
- Ratio analysis is performed based on a strict set of rules governed by generally accepted accounting
principles.
- A firm's ratios may vary year over year, so they are not helpful for evaluating whether firm goals are
met.
- Ratios are helpful only when comparing companies that are the same size and that use the same
operational style. - ✔✔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
How might calculating financial ratios help shareholders? - ✔✔Ratios can be used to determine
whether a firm is maximizing shareholder wealth.
The firm Betsy's Books conducts a financial analysis using ratios to know how it is performing in
comparison to other similar firms. What is this process called? - ✔✔Benchmarking
5 Major Categories of Ratios - ✔✔1 - Liquidity
2- Activity
3 - Leverage
4 - Profitability
5 - Market
Liquidity Ratios - ✔✔measure a firm's ability to meet short-term obligations and include the current
ratio and quick ratio.
Activity Ratios - ✔✔AKA Efficiency ratios; measure how well the company uses its assets to generate
sales or cash -- the firm's operational efficiency and profitablilty.
Leverage Ratios - ✔✔A category of ratios that consider how a firm is financed, aka financing ratios or
solvency ratios.
Profitability Ratios - ✔✔A category of ratios that are commonly used to directly judge how well
management is doing as they strive to maximize owner wealth.
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