Ratios provide one way to compare companies in the same industry regardless of their size.

Question

BlackTom AI · Accepted Answer

When comparing companies in the same industry, ratios are commonly used to normalize for size differences, enabling meaningful comparisons across firms.
Option 1 (True): Ratios such as gross margin, operating margin, return on equity, asset turnover, and debt-to-equity are dimensionless or standardized metrics. By expressing relationships between financial statement items, these ratios reduce the impact of absolute scale and allow analysts to assess efficiency, profitability, leverage, and liquidity on a relative basis across similar companies.
Option 2 (False): Saying ratios cannot compare companies of different sizes would ignore the purpose of ratio analysis. Without normalization, larger firms could dominate absolute figures (like revenue or assets) even if efficiency or profitability differs. Ratios address this by presenting proportional relationships rather than raw totals.
Option 3 (False): The claim that ratios are only useful for one dimension (e.g., profitability) is incorrect; many ratios cover multiple aspects such as liquidity, solvency, efficiency, and performance, providing a toolkit for cross-company comparisons.
Option 4 (False): If one suggests that industry differences invalidate ratios entirely, that is a misconception. While industry context matters for benchmark interpretation, ratio comparisons within the same industry are indeed a standard practice for sizing and performance assessment.

Ratios provide one way to compare companies in the same industry regardless of their size.

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