ACCA FR Syllabus C. Analysing And Interpreting The Financial Statements - Ratio limitations - Notes ^{1 / 1}

Factors affecting comaparability

1. Different accounting policies

   Eg One company may revalue its property; this will increase its capital employed and (probably) lower its ROCE

   Others may carry their property at historical cost

2. Different accounting dates

   Eg One company has a year ended 30 June, whereas another has 30 September

   If the sector is exposed to seasonal trading, this could have a significant impact on many ratios.

3. Different ratio definitions

   Eg This may be a particular problem with ratios like ROCE as there is no universally accepted definition

4. Comparing to averages

   Sector averages are just that: averages

   Many of the companies included in the sector may not be a good match to the type of business being compared

   Some companies go for high mark-ups, but usually lower inventory turnover, whereas others go for selling more with lower margins

5. Possible deliberate manipulation (creative accounting)

6. Different managerial policies 

   e.g. different companies offer customers different payment terms

Compare ratios with

1. Industry averages

2. Other businesses in the same business

3. With prior year information

Future raising of capital cannot be ascertained through ratio analysis.