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UV1765

RATIOS TELL A STORY—2005

Financial results vary between companies for a number of reasons. One reason for the variation can be traced to the characteristics of the industries in which the companies operate. For example, some industries require large investments in property, plant, and equipment, while others require very little. In some industries, the product-pricing structure allows companies to earn significant profits per sales dollar, while in other industries the product-pricing structure imposes a much lower profit margin. In most low-margin industries, however, companies often experience a relatively high volume of product throughput in their businesses. A number of industries are also characterized by lenient credit terms, while others sell for cash only.
A second reason for some of the variation in financial results between companies is the result of management policy. Some companies reduce their manufacturing capacity to match more closely their immediate sales prospects, while others carry excess capacity to be prepared for future expansion. Also, some companies finance their assets with borrowed funds, while others avoid that leverage and finance their assets with owners’ equity.
Of course, one other reason for some of the variation in reported results between companies is the differing competencies of management. Given the same industry characteristics and the same management policies, different companies may report different financial results simply because their managements perform differently.
Those differences in industry characteristics, in company policies, and in management performance are reflected in the financial statements published by publicly held companies, and can be highlighted through the use of financial ratios.
Exhibit 1 presents balance sheets in percentage form and selected ratios computed from...

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