Limitations of Ratio Analysis

Limitations of Ratio Analysis - 4. Published peer group or...

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Limitations of Ratio Analysis 1. Accounting practices between firms vary and can lead to differences in computed ratios a. Inventory methods b. Depreciation methods 2. Accounting data easy to manipulate 3. It is sometimes difficult to identify the industry category (NAICS) particularly when a company engages in multiple lines of business
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Unformatted text preview: 4. Published peer group or industry averages are approximations and provide the user with general guidelines a. An industry average may not be a desirable target ratio or norm 5. Many industries have seasonal sales and their corresponding ratios vary with the time of the year 1...
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