What is the second step in ratio analysis?

Question

BlackTom AI · Accepted Answer

When approaching the question about the second step in ratio analysis, it helps to map out the typical sequence of activities in ratio analysis. 
Option a: 'Interpret the ratio' would usually come after the ratio has been calculated and compared; interpretation is generally the final step where you draw conclusions from the comparison.
Option b: 'Compare the ratio with a benchmark' fits the common methodological flow, because after computing a ratio you compare it to a benchmark (such as a benchmark ratio, industry norms, or historical performance) to gauge performance. This comparison provides a basis for assessment and interpretation.
Option c: 'Calculate a meaningful ratio' is typically the first substantive step—defining and computing the ratio itself—so it would precede any benchmarking or interpretation rather than be the second step.
Option d: 'Compare the ratio with industry averages' is a specific form of benchmarking. While benchmarking against industry averages is a valid comparison, the broader and more general second step is to compare with a benchmark (which could be industry averages, internal targets, or historical benchmarks). If the question emphasizes the second step in the general process, choosing a broader benchmark makes sense.
In summary, the progression usually moves from computing the ratio to comparing it to a reference point, then interpreting the result. Each option reflects a distinct phase, but the sequencing places comparison immediately after calculation, and interpretation follows after comparison.

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