The Pitfalls of Comparing Financial Ratios Across Different Industries

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From the e-Activity, determine why it is sometimes misleading to compare a company’s financial ratios with those of other firms that operate within the same industry. Support your response with one (1) example from your research. There are a number of comparative ratios that are available, which include Dun and Bradstreet, Value Line, and the Annual Statement Studies published by Risk Management Associates. When a person is out looking at these sources, he or she has to understand that each source has a different emphasis.

For example, Dun and Bradstreet looks at proprietorships, and sells its information to lenders and banks. Thus, D&B has more of a focus on current liabilities and assets, and not market ratios. Moreover, same size companies, in the same industry can use different accounting methods. For example, one organization may use a First In First Out approach, another may use First In Last Out approach. The difference of these approaches could alter several aspects of an organization’s financial data.

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From the scenario, determine two (2) strategies that TFC could utilize to reach its expansion goals. You may, for example, consider your analysis of TFC’s financial statements, as well as your knowledge of TFC’s excessive cash position. Provide a rationale for your response.

One action that TFC could take in order to raise capital that will, in turn, enable it to reach its expansion goals is to take on a partner or partners. With Joe wanting to keep that company because of sentimental reasons, he could bring partners in as limited partnerships.

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These limited partnerships normally have no control in the business (Bringham & Ehrhardt, 2014). Moreover according to Bringham & Ehrhardt, limited partnerships are common in venture capital. Another opportunity for TFC to raise capital is to issue stock. This will allow the organization to raise money by taking the company public, but there could be challenges with this option. With Joe wanting to make sure the business stays in the family, it could open the company up to take overs

Brigham, E. F., & Ehrhardt, M. C. (2014).

Financial management (14th ed.). Mason, OH: South-Western Cengage Learning.

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The Pitfalls of Comparing Financial Ratios Across Different Industries. (2016, Sep 01). Retrieved from

The Pitfalls of Comparing Financial Ratios Across Different Industries
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