Question

Ratio Analysis cannot be taken at face value for all of the following reasons except:

a. No underlying theory exists to pinpoint exact benchmarks.

b. While GAAP is consistent across the globe, multiple currencies may be considered.

c. Large Conglomerates can cross more than one industry type.

d. Different standards and procedures can exist from country to country.

e. Benchmarks can vary based on industry and company size.

Answer 1

(a) This is true as no underlying theory exists and hence there is no structural framework.

(b) This is true as the challenge posed by multiple currencies makes it impossible for ratio analysis to be taken at face value.

(c) This is true. A ratio analysis of a large conglomerates may pose the challenge of similar analysis and benchmarking for different industry type.

(d)This is also true. Different countries follow different accounting standards and than makes it impossible to take ratio analysis at face value.

(e) This is false and the CORRECT answer. Ratio analysis is made meaningful by comparing it with industry benchmark and/or benchmark based on company size. For example,it makes perfect sense to perform ratio analysis of Etihad Airways and compare its findings as per Airline industry benchmarks and not against FMCG or IT industry