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Importance of Comparing Financial Ratios

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What are the four primary categories of financial ratios? Why is it important to compare financial ratios to industry averages?

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Solution Summary

564 words and an attached chart (made in Word) outline 4 categories of financial ratios and the importance of comparing them to gain insight.

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1. Categories of Ratios

The primary goal of financial management is to maximize the stock price and not the net income or Earning Per share (EPS).Analysis of any firm's financial statements can highlight its shortcomings and that information can be used to improve performance. Financial statements are used by internal as well as external users with different objectives. Therefore different specific ratios serving some common purpose are listed or included in different groups or categories. Managers aim to improve performance. Lenders are interested in evaluating possibilities or capability of the firm of repaying loans and interest. Stockholders want to forecast dividends and stock prices. Financial statement analysis begins with calculation of a set of financial ratios or specific ratios in ...

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