Ok, What Is Meant By Industry Financial Ratios?

Financial ratio analysis reports are broken down into the various ratio categories:

1. Predictor Ratios indicate the potential for growth or failure.
2. Profitability Ratios which use margin analysis and show the return on sales and capital employed.
3. Asset Management Ratios which use turnover measures to show how efficient a company is in its operations and use of assets.
4. Liquidity Ratios which give a picture of a company's short term financial situation or solvency.
5. Debt Management Ratios which show the extent that debt is used in a company's capital structure.

In assessing the significance of various industry financial data, experts engage in financial ratio analysis, the process of determining and evaluating financial ratios.

A financial ratio is a relationship that indicates something about an industry's activities, such as the ratio between the industry's current assets and current liabilities or between its accounts receivable and its annual sales.

The basic source for these ratios are the company financial statements within the industry that contain figures on assets, liabilities, profits, and losses. Industry ratios are only meaningful when compared with other information.

Since individual companies are most often compared with industry data, ratios help an individual understand a company's performance relative to that of competitors and are often used to trace performance over time.

Ratio analysis can reveal much about an industry. However, there are several points to keep in mind about ratios.

First, financial ratios are "flags" indicating areas of strength or weakness. One or even several ratios might be misleading, but when combined with other knowledge of an industry, ratio analysis can tell much about that industry.

Second, there is no single correct value for a ratio. The observation that the value of a particular ratio is too high, too low, or just right depends on the perspective of the analyst.

Third, a financial ratio is meaningful only when it is compared with some standard, such as another industry trend, ratio trend, a ratio trend for the specific industry being analyzed.

In trend analysis, industry ratios are compared over time, typically years. Year-to-year comparisons can highlight trends and point up the need for action. Trend analysis works best with five years of ratios.