Ratio analysis works best when evaluating the financial statements of two firms
A)in the same industry but located in different countries.
B)of differing sizes in the same industry.
C)with one being in a single line of business while the other is a conglomerate.
D)of the same size in differing industries.
E)when both are conglomerates with varying lines of business.

Question

Quizplus · Accepted Answer

Ratio analysis is most effective when comparing companies of similar size and within the same industry. Comparing companies of different sizes in the same industry allows for a more accurate assessment of their financial performance, as differences in size can significantly impact financial ratios. Comparing companies in different industries or with differing lines of business can lead to misleading conclusions as the nature of their operations and financial metrics may be vastly different. Thus, Option B is the correct choice.

Ratio Analysis Works Best When Evaluating the Financial Statements of Two