Second part questions.docx - Second part questions Q A...

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Second part questions Q - A financial ratio by itself tells us little about a company because financial ratios vary a great deal across industries. There are two basic methods for analysing financial ratios for a company: time trend analysis and peer group analysis. Why might each of these analysis methods be useful? What does each tell you about the company’s financial health? Time trend analysis gives a picture of changes in the company's financial situation over time. Comparing a firm to itself over time allows the financial manager to evaluate whether some aspects of the firm's operations, finances, or investment activities have changed. Peer group analysis involves comparing the financial ratios and operating performance of a particular firm to a set of peer group firms in the same industry or line of business. Comparing a firm to its peers allows the financial manager to evaluate whether some aspects of the firm's operations, finances, or investment activities are out of line with the norm, thereby providing some guidance on appropriate actions to take to adjust these ratios if appropriate. Both allow an investigation into what is different about a company from a financial perspective, but neither method gives an indication of whether the difference is positive or negative. For example, suppose
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