Ratio Analysis—Limitations of Ratios
In the video, Jim walks through several key limitations in the areas of reliability, comparability, relying on only one data source, and using information based in the past. Which limitation do you feel is the most worrisome? What might you do to compensate for the limitation you identified?
Outside of the four key areas of limitations, Jim also explores a number of key elements that ratios aren’t able to convey. What characteristics of a firm would you most want to know about if you were to invest that you would not be able to glean from ratios? How would you go about gathering that information if you cannot get it through financial statements and ratio analysis?
The Problem with Earnings per Share (EPS)
What does Zach DeGregorio cite as the most beneficial characteristics of using EPS in financial analysis? And the most problematic?
After watching the video and listing the key benefits and problems with EPS, how do you feel about the EPS calculation? Should investors use it? Why or why not? If you were going to invest a large sum of money in a company, would you use EPS data in your decision-making process? Why or why not?