ECON 4 Lecture Notes - Lecture 12: Time Series, Capital Structure, Financial Statement
Document Summary
Ratios are useful in assessing features of a firm including (but not limited to) profitability, liquidity, and risk. Ratios must be compared to a benchmark (ie: control group) Compare to the same firm at different points in time. Compare the firm to other firms in the industry. Using an appropriate benchmark is important since. Major changes within a firm distort time-series analysis. Difference in business strategy, capital structure, or business segments distorts cross-sectional analysis. Differences in computing methods can make things mess up. If a company doesn"t provide context, take it with a grain of salt. Very easy to make the numbers do what they want you to do. Ratios should be used in a strictly contextual sense. A ratio going up or down isn"t necessarily indicative of a good thing or a bad thing happening, but must be examined in a greater scope. Ratios should not be used to provide answers, but instead, to guide informed lines of questioning.
