Final answer:
Companies use financial ratios to assess operational efficiency, liquidity, profitability, and solvency. Ratios like the 5% annual growth rate, four-firm concentration ratio, and HHI offer insights into a company's growth and the competitive landscape of an industry.
Step-by-step explanation:
Companies can use financial ratios to analyze their financial performance by comparing different financial statement accounts to gain insights into their operational efficiency, liquidity, profitability, and solvency. These ratios provide a quantitative analysis of a company's financial health and can help in decision-making processes. For example, to assess a company's growth, we may describe a 5% annual growth rate, highlighting the year-over-year increase in revenue or profits.
Market share data can also be utilized in calculating ratios like the four-firm concentration ratio, which measures the combined market share of the four largest firms in an industry. This ratio, along with the Herfindahl-Hirschman Index (HHI), helps to understand the level of competition within a market. A high concentration ratio or HHI indicates less competition, potentially leading to monopoly power and economic inefficiencies.
As an example, Table 11.2 lists the four-firm concentration ratio and HHI for various industries, using data from respected sources such as Statista.com, The Wall Street Journal, Gartner.com, and the U.S. Bureau of Transportation Statistics. These ratios help regulators and businesses evaluate market dynamics and competition.