Financial ratios that are higher than industry averages may indicate problems that are as detrimental to the firm as ratios that are too low.

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Financial ratios that are significantly higher than industry averages may indicate that the firm is not managing its resources efficiently. For example, a high debt-to-equity ratio may signal that the company is relying too heavily on debt to finance its operations, which could put it at risk during economic downturns or when interest rates rise. Other ratios that may be affected by high levels of debt include interest coverage and return on equity. Similarly, a high current ratio may suggest that the company is not investing its excess funds in growth opportunities or is carrying too much inventory relative to its sales. Ultimately, while high ratios may seem desirable on the surface, they may mask underlying problems that could threaten the company's financial health in the long run.

Financial Ratios That Are Higher Than Industry Averages May Indicate