For exclusive use Universidad Panamericana, 2015
Harvard Business School

9-101-029
September 5, 2000

Financial Statement and Ratio Analysis
Financial ratios are a popular way for users of financial statements to develop insights into the financial performance of companies. By controlling for the effect of firm size on the level of performance, ratios enable financial statement users to examine how a firm has performed relative to its peers and relative to its own historical performance.
A firm’s ratios can differ from its peers or its own historical performance because it has selected a different product market strategy, because its management team has become more effective at implementing its strategy, or because it has selected a different financial strategy. Of course, as we have seen throughout the course, sometimes firms can appear to perform differently because they have selected different accounting methods for reporting the same underlying economic events. For this reason, a precursor to effective financial ratio analysis is the development of a clear understanding of how a firm’s accounting decisions compare with those of its competitors, or with its own decisions in prior years. If there are important differences in accounting decisions, it may be necessary to make adjustments to the affected firms’ financial statements to ensure that ratio comparisons isolate differences in strategy or performance. Common adjustments include: treating operating leases as capital leases; adjusting LIFO inventories to a FIFO basis; changing the write-off period of intangible assets; restating reserves and charges for bad debts warranties and product returns; recognizing the possible impact of unrecognized potential contingent liabilities; revaluing tangible and intangible assets to reflect their fair market value; and valuing debt obligations to