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What are the limitations of using ratios for financial statement analysis?

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What are the limitations of using ratios for financial statement analysis? What are the benefits? Will different user groups focus on different ratios? Why or why not? Which ratios would you use to analyze a company? Why?

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* What are the limitations of using ratios for financial statement analysis?
- Comparison with industry averages is difficult for a conglomerate firm that operates in many different divisions.
- "Average" performance is not necessarily good, perhaps the firm should aim higher.
- Seasonal factors can distort ratios.
- ...

Solution Summary

This solution identifies some of the limitations of using ratios for financial statement analysis, benefits, and different user groups in point form.

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