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Unformatted text preview: The firm’s liquidity ratios are low; most of its asset management ratios are poor (except fixed assets turnover); its debt management ratios are poor, most of its profitability ratios are low (except profit margin); and its market value ratios are low. i. What are some potential problems and limitations of financial ratio analysis? Answer: Some potential problems are listed below: 1. Comparison with industry averages is difficult if the firm operates many different divisions. 2. Different operating and accounting practices distort comparisons. 3. Sometimes hard to tell if a ratio is “good” or “bad.” 4. Difficult to tell whether company is, on balance, in a strong or weak position. 5. “Average” performance is not necessarily good. 6. Seasonal factors can distort ratios. 7. “Window dressing” techniques can make statements and ratios look better....
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.
- Spring '08