From the course: Running a Profitable Business: Understanding Financial Ratios
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Excess data and comparability issues
From the course: Running a Profitable Business: Understanding Financial Ratios
Excess data and comparability issues
- Okay, we have to be careful, now. There are potential pitfalls associated with financial ratio analysis, and we've got to be aware of those pitfalls so that we can carefully do our analysis and carefully apply our results. I think of four things right off the top of my head. First is, financial information is not all the value-relevant information that's available about a firm. Secondly, financial statements from different companies are sometimes not comparable. We'll look at a couple of examples of that. Third common mistake is, we always seem to be searching for one problem, when it could be that there's a multitude of reasons a company is doing very well or doing very poorly. And then, the fourth common mistake with financial ratio analysis is we weight information differently. We either look at history too much, the distant past too much, or we anchor on the recent past. We've got to be careful when we're using…
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