Practice question · Select all that apply
Which benchmarks make a ratio meaningful?
Hints
- A ratio only means something against a reference point.
- An unrelated industry provides no valid comparison.
Show the answer
- A. The same firm over several years (trend analysis)
- B. Competitors in the same industry
- C. Covenant targets set by lenders
Why
Ratios need context: time trends, peer comparison, or contractual thresholds. A random firm in an unrelated industry provides no useful benchmark.
Practise Financial Statement Analysis
The app has 6 more questions on this lesson, and keeps your place in the course. Business I is free to start.
More questions on Financial Statement Analysis
- EBIT 450, interest expense 90. Estimate the interest cover ratio.
- Liquidity, solvency, or profitability ratio?
- Match each DuPont component to its formula.
- A firm's ROE rises from 12% to 20% while its ROA is unchanged. What has management actually done?
- A firm's ROE is 18% but its ROA is only 6%. The DuPont leverage multiplier must be:
- A firm reports rising profit and an interest cover falling toward 1. What does that combination indicate?