4-1 4-2 Financial ratio analysis is conducted by three main groups of analysts: credit analysts, stock analysts, and managers. What is the primary emphasis of each group, and how would that emphasis affect the ratios they focus on? Why would the inventory turnover ratio be more important for someone analyzing a gro- cery store chain than an insurance company? Over the past year, M. D. Ryngaert & Co. had an increase in its current ratio and a decline in its total assets turnover ratio. However, the company's sales, cash and equivalents, DSO, and fixed assets turnover ratio remained constant. What balance sheet accounts must have changed to produce the indicated changes? 4-3 4-4 4-5 Profit margins and turnover ratios vary from one industry to another. What differences would you expect to find between the turnover ratios, profit margins, and DuPont equa- tions for a grocery chain and a steel company? How does inflation distort ratio analysis comparisons for one company over time (trend analysis) and for different companies that are being compared? Are only balance sheet items or both balance sheet and income statement items affected? If a firm's ROE is low and management wants to improve it, explain how using more debt might help. 4-6 4-7 4-8 (4.9) Give some examples that illustrate how (a) seasonal factors and (b) different growth rates might distort a comparative ratio analysis. How might these problems be alleviated? Why is it sometimes misleading to compare a company's financial ratios with those of other firms that operate in the same industry? Suppose you were comparing a discount merchandiser with a high-end merchandiser. Suppose further that both companies had identical ROEs. If you applied the DuPont equa- tion to both firms, would you expect the three components to be the same for each com- pany? If not, explain what balance sheet and income statement items might lead to the component differences. Indinntal 4-10