Question

Financial ratios are powerful tools due to the fact that standard definitions exist and there is a set standard that should be met for each ratio.

True
False

Answer 1

False, Financial ratios have standard definitions but do not have a universal set standard to be met; they are benchmarks for comparison.

Step-by-step explanation:

It is false that financial ratios have a set standard that should be met. While it is true that financial ratios are powerful tools because they have standard definitions, the idea of a specific standard that must be met is not accurate. Ratios such as the four-firm concentration ratio are used to measure market concentration and monopoly power within an industry, but they do not have a 'set standard' for what constitutes an acceptable or ideal level. Instead, ratios offer benchmarks that can help compare companies or industries over time or against sector averages. For example, understanding that ratios can scale distances or dimensions, help in dimensional analysis, or represent data on a ratio scale are all foundational for interpreting financial ratios correctly.