Question

From the e-Activity, 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 one (1) example from your research. * From the scenario, determine two (2) strategies that TFC could utilize to reach its expansion goals. You may, for example, consider your analysis of TFC’s financial statements, as well as your knowledge of TFC’s excessive cash position. Provide a rationale for your response.

Answer 1

From the e-Activity, 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 one (1) example from your research.

It is sometimes misleading to compare a company’s financial ratios with other firms within the same industry, because there are many factors that can affect the ratio. It may also due to different accounting method followed by accounting methods used by the companies. For example a small company emphasizes more on ratios such as for calculating financial position of the business company emphasizes more on current assets and current liabilities rather than on market value ratios. For example, company that uses FIFO method for valuing its ending inventory cannot compare with the company that uses LIFO method in valuing its ending inventory. Ratios computed from such data differ and they provide misleading information when used to compare the two companies even if they operate in the same industry .The results provided by the food industry and distributing industry also differs because one is capital intensive and other is labor intensive.

* From the scenario, determine two (2) strategies that TFC could utilize to reach its expansion goals. You may, for example, consider your analysis of TFC’s financial statements, as well as your knowledge of TFC’s excessive cash position. Provide a rationale for your response.

Two strategies that TFC could utilize to reach its expansion goals are;

By diversifying the product or service line such as selling complementary products or providing services related to   gyms, yoga classes etc.
By selling bond with longer duration also helps in raising the capital .By doing so it can bring its ratios with the industry standard and secondly they must ensure that their products should be reasonably priced.