1. How do you think financial ratios differ across different industries?

Compare two
industries of your choice and select a few ratios and explain whether you think the ratios
would be higher or lower for each of those industries and explain why.

Financial ratios differ across different industries because every company has its own,
separate and distinct norms when analyzing performances. Comparing the ratios between
neighborhood corner store (bodega) and a boat sales company, the numbers will be
different in that the bodega in its turnover in inventory will be higher because they sell
their merchandise faster than that of the boat dealer. Therefore, the daily inventory of the
bodega will be lower. The time it will take to sell and collect for products (operating cycle)
sold at the boat dealer, will be longer than that of the bodega. However, the boat dealer’s
inventory will stay on hand longer resulting in higher operating cycle.

My belief is that bodegas would have a higher profitability ratio because of their locations
and how the business is structured within the neighborhood. Many bodega owners live
where they work, capitalizing on the use of space and debt to income ratios which allows
them to make enough money to stay in business for a long time and accumulate a huge
profit in sales. Bodegas are centrally located in every neighborhood in New York City. New
York’s land area is approximately 305 sq. miles compared to 164 sq. miles of water and
there are more than 13,000 Bodegas in and around the city with an average population of
48,000 people per square mile buying goods from those bodegas on a daily basis, compared
to approximately 118 boat dealers which are mostly throughout the State of New York. The
bodega’s convenient location and it’s high turnover of inventory and the fact that food and
home goods are necessities compared to the want of or leisure thereof of having a boat in
New York, the bodega is always going to have a high sales volume compared to the boat
dealer.

2.       What are some uses and limitations of financial ratios?

Financial ratios are useful in making financial statements more clear. Several uses for these
ratios are to analyze a company over time to understand and estimate its performance in
changing economic conditions, finding trends in a company’s past performance, allowing
investors and analyst to compare liquidity, solvency, profit and valuation of a company,
how to measure a company’s available cash to pay its debts, how quick it can convert
noncash assets to cash assets, its ability to repay long term debt, its use of assets and its
responsibility of owning and issuing stock.

Limitations of financial ratios consist of seasonal factors, different accounting practices

within the same company, such as leasing or buying equipment, inflation, difficulties
finding averages in large companies with several different divisions, knowing a company’s
current information but the analysis reflects information from the past.