dangerous or misleading to compare financial ratios industry
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Need help in discussing and addressing the following concerning financial ratios:
Do you think it is dangerous or misleading to compare financial ratios with other firms in the same industry? Why or why not?
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Solution Summary
Your tutorial is 567 words plus a reference. Yes, this is dangerous and reasons are given as to why.
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I think it can be misleading to compare financial ratios with other firms in the same industry, although it is less misleading than comparing to those outside the industry.
One reason is that the other firms in the industry may not have the same product mix. Different products will alter the pricing and profits at the gross margin line and make that ratio off by comparison. So, although they sell the same items overall, one might sell mostly appliances and the other building materials, and so their profitability will not be as comparable due to the varying mark up on the items sold. So, comparing the gross margin will reveal a difference in profitability when it is really just a product mix difference, not a pricing or cost advantage or disadvantage.
Another reason it can be misleading to compare financial ratios with other firms in the same industry is that the ...
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