A. For businesses with seasonal sales patterns, cash, receivables, and inventories change over the course of the year, along with current obligations. Thus, unless averages (monthly ones are better) are employed, ratios that assess balance sheet statistics will change.
B. Common equity is calculated on a specific day, let's say December 31, 2014. Profits are acquired gradually, let's say in 2014. If a company is expanding quickly, year-end equity will be significantly higher than year-start equity. As a result, the calculated rate of return on equity will vary depending on whether end-of-year, year-start, or average common equity is used as the denominator. The optimum number to use is average common equity, theoretically. It has been alleged that individuals have purposefully exploited end-of-year or beginning-of-year equity in public utility rate cases to make returns on equity appear excessive or insufficient. When a company is being reviewed, similar issues can occur.
<h3>What is Ratio Analysis?</h3>
Businesses utilise ratio analyses to analyse and contrast the financial performance of various products in their production line. Understanding some of the challenges that affect a business, such as its profitability, operational effectiveness, and liquidity, is beneficial.
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