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?

2. Financial ratios are useful tools for evaluating a company’s financial position and operations and may reveal areas that need further investigation.  However, when analyzing company’s performace one should take into account that different industries may have different norms. If we compare the ratios between small grocery store and car dealer store, the numbers will be absolutely different. The inventory turnover, which measures the relative size of inventories will be higher in a grocery store, because they sell their inventory faster than car dealer’s. Therefore, it will lead to lower days’ inventory on hand in grocery store. Dealer store’s operating cycle, or the time it takes to to sell products and collect for them, will be longer than one of grocery store. In dealer store the inventory stays longer on hand resulting in higher operating cycle.

3. Supermarkets I think would have high liquidity and profitability ratio because they do make enough money to stay in business for a long time and they make a lot of profit in sales. Everyone needs food and supermarkets are always going to get sales. Some supermarkets are even on the New York Stock Exchange and are doing really well like WholeFoods it closed at $52.25 today which I thought was great, I didn’t know their stock was that high, so I am pretty sure their shareholders are making a profit on their investment.

4. There are different uses of the financial ratios. These ratios are helpful to make the financial statements more clear. They are effective to compare the companies that are not in the same sizes. They make it easier to see the necessary information, and we do not have to know all the financial information. They help us to see the performance of companies in different period, and it is useful to understand the trends.

There are also several limitations of the financial ratios. Every company does not have the same environmental features with the other ones because of its different industry, and this may be the reason to make the wrong comparison between the companies. The financial account information and policies may be affected by making estimations. The users need to know the current information of the company, but the ratio analysis shows the information of the past time.

5. Financial ratios allow investors and analysts to compare companies in their activity, liquidity, solvency, profitability, and valuations. However, ratios have little meaning when comparing companies across different industries.  To see how well or poorly a company is performing, it should be compared to its peer companies in its industry. Comparing companies across different industries is like comparing apples to oranges. Of course the ratios will differ substantially in substantially different industries that operate, finance, and invest under different strategies. There are so many factors to consider before investing in a company.

6. Financial ratios can be used to make financial statements simpler and easier to read and understand by looking at a few numbers instead of the whole financial statement. If you’re comparing companies of different sizes, it makes it easier to compare them both. Also, financial ratios help when analyzing trends for a company and whether the trends are good or bad, you can adjust your course of business based on the trends information. Financial ratios have their limitations too. Accounting policies between companies can differ so the information that is estimated or assumed will not be the same. Companies operate in different industries and therefore will have different regulations and structure. These factors can be so different that comparing the companies would not be accurate.

7. Financial ratio- a relationship that tells how something about a company’s actives such as a ratio between the current assets and its current liabilities or between its account receivable and its annual sales. They can differ across different industries by the size of a series of financial data when making comparisons over time or between firms and also show the strengths and weaknesses of that company. The 2 industries of my choosing would be fast food restaurants. The 1st would be binker international and the 2nd would be yum brands. It shows that yum brands which as places such as pizza hut, taco bell, kfc or long john silver has more when it comes to liquidity and profitability. For liquidity it shows the current ratio being 1.01 for yum compared to only 0.49 for binker. For profitability it shows that for yum brands it is 17.21 and binker only 9.92. The yum brands would be higher because this is something you are able to take on the good and get a faster and quicker service.