Top 5 do’s and don’ts of using financial ratios
Top 5 do’s
1. Do: use the right benchmarks
A ratio is meaningless and potentially misleading on its own. To interpret a ratio properly it is essential to use an appropriate benchmark.
Suitable benchmarks can be from internal or external sources. Internally: historic data or another product, service, customer or geographical territory make the best benchmarks. Externally: competitor information (if obtainable), industry data, external analyst reports and government statistics can be useful.
Be careful when comparing to the industry norm. This will be an average and include some extreme top performers and extreme poor performers which may distort the average. It is better to compare against a pre-selection ...
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