Which of the following statements is correct?
A) Performing cross-sectional ratio analysis refers to assessing how a firm performed over a certain section of time.
B) Performing cross-sectional analysis is easy since industries are usually clustered with firms that are identical.
C) Time-series analysis is useless in assessing improvement or deterioration of ratios since the data is historical.
D) To interpret financial ratios, users should analyze the performance of the firm over time and the performance of the firm against one or more companies in the same industry.

Question

Quizplus · Accepted Answer

Cross-sectional analysis involves comparing a company's financial metrics against those of other firms in the same industry at a specific point in time, not over a section of time. Industries often have firms with significant differences, making cross-sectional analysis challenging. Time-series analysis, which looks at a company's financial data over time, is valuable for assessing trends and changes in performance. Therefore, the correct interpretation of financial ratios involves both time-series analysis (to see how the company has performed over time) and cross-sectional analysis (to compare the company's performance to that of its peers).

Which of the Following Statements Is Correct