Ratio analysis enhances our understanding of three basic attributes of performance: liquidity, profitability, and the ability to create shareholder value. A rational Investor would prefer to receive $1, 200 today rather than $100 per month for 12 months. The price of a computer today is $400 and inflation is 5% per year. Therefore, in two years the price of the computer is expected to be $440. For a given stated interest rate, an investor would receive a greater future value with daily compounding as opposed to monthly compounding. An Investment earning simple interest is preferred over an Investment earning compound interest because the simplicity adds value. Financial ratios are often reported by industry or line of business because differences in the type of business can make ratio comparisons uninformative or even misleading. the realized rate of return, or holding period return, is equal to the holding period dollar gain divided by the price at the beginning of the period. How managers choose to finance the business does not affect the rate of return to shareholders because the rate of return is based on how the company uses the assets it has, not whether or not they paid for the assets with debt or equity. A return of 12% compounded annually is the same as a return of 1% per month. The risk-return tradeoff that Investors face on a day-to-day basis Is based on realized rates of return because expected returns involve too much uncertainty