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Determine why it is sometimes misleading to compare a company’s financial ratios with those of other...

Determine why it is sometimes misleading to compare a company’s financial ratios with those of other firms that operate within the same industry. Support your response with an example

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Expert Solution

It is misleading to compare the financial ratio of one company with other company because-

A. Financial ratios are just reflecting the quantitative position of the companies

B. Financial ratios are not reflecting the overall risk which has been undertaken in generating the rate of return and other core competitiveness of the companies

C. Direct comparison between two company will also not include the composition of their board of directors and the business reputation.

D. Ratio are generally historical figures and value then they are not discounting the futuristic values so we should be trying to look for the futuristic valuation and hence it could be delusive.

E. Financial ratios are also based upon books of accounts which can be manipulated according to the convenience of the board of directors so they can be reflective of misrepresented informations.

For example, the profitability of two companies can be compared but if the books of accounts of one company is completely manipulated then the comparison will be leading to bad investments and bad decision making

jeff jeffy answered 2 years ago
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