Question

How do you think financial ratios differ across different industries? Compare two industries of your choice and select a few ratios and explain whether you think the ratios would be higher or lower for each of those industries and explain why. 2. What are some uses and limitations of financial ratios?

Answer 1

Yes financila ratio do differ across different industries. Let us talk about book to price ratio. In banking sector most of company wil have PB ratio of around 1 or 1.5 , however if we look sectors such as infrastructure PB ratio will be of 5 or more. The basic reason is that the price is determined on future ability of compnay to generate the revenue. If we look at banking sector it will provide constatnt growth or say revenue over the years , however in infrastructure revenue of company may increase significantly if there is nay change in goverment policies or on winning huge orders.

uses and limitations of financial ratios

Uses:

Financial ratios are not very usefull on standalone basis. They must be benchmarked against something. Normally they are used for following

1) The industry nome: Means a praticular ratio must me of certain level

2) Aggregate economy : It is sometimes important to analyze a company's ratio over a full economic cycle. This will help the analyst understand and estimate a company's performance in changing economic conditions, such as a recession

Limitations:

1) It is difficult to find a meaningful set of industry- average ratios
2) Different accouning practice can distort ratio analysis
3) A company may have some good ratio as well as bad ratio, making it difficult to interprete the company