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

1. Yes, Financial ratios differ across industries. A capital intensive industry will require a large amount of capital assets to produce goods and will have a different set of ratios when compared to a less capital intensive industry. An automobile manufacturer is highly capital intensive meaning to say it required large fixed assets and hence its debt to equity ratio will be higher due to higher debt. Now, if we compare it to an Information Technology services company which is not capital intensive, the information technology services company will have a lower debt to equity ratio since its not capital intensive.

2. Uses of ratios: Easy financial analysis, ease of use, can throw up good depictions that plain financial statement would not.

The limitations are that these are historical and backward looking, may not consider inflation in the economy and will not show correct result for cyclical or seasonal industries.