Financial ratios are designed to provide users of information that are useful matrix to evaluate business activities. The result provides quick and consistent insights to facilitate decisions, projections, educated financial guesses based on historical results, and corresponding ratios. For example, a gross profit margin to project gross profit in the future based upon revenue estimates.
Comparing a companies' financial ratios to a peer group is an analytical practice that helps give a basis for understanding companies' specific ratios. By using a relative comparison to a group of companies in the same industry, an analyst can form better decision-making conclusions. Keep in mind that the comparisons are useful when in the same peer group in terms of the products or services offered.
Ratios are based on historical information, and there is no guarantee that history will repeat itself. Historical data can sometimes also include unusual or nonrecurring activities that may not be present moving forward. For example, A company can have substantial financial ratios but be put out of business overnight by a big competitor. Financial ratios by themselves may not indicate such immediate change and, therefore, must be interpreted along with other circumstances.
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