Question

1. 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

Solution:

Question 1 )

Financial ratios differ across the industry as every industry has a certain pattern in financial statements. Let's take an example of the software industry and asset-heavy industry like the steel industry.

Debt to assets ratio: Generally Software companies will have less debt as compared to the steel industry hence this ratio will be lower for the software industry.

Profit Margin: Generally Software companies will have a higher profit margin than that to the steel industry because the cost in the case of software industries will be lower as compared to the steel industry.

Times Interest Earned: The software companies generally have less debt and hence less interest payment. Operating income is higher and hence higher ratio as compared to the steel industries.

Question 2 )

Uses of financial ratio:

• It gives the idea about the financial standing of the company
• We can compare the ratio with the industry average to see how the company is performing
• We can analyze liquidity, profitability, solvency, and efficiency based on the ratio

Limitation:

• The ratio is based on quantitative data and qualitative analysis is not there in the financial ratio