Problems with Comparing Firm Ratios with Industry Ratios

Explanation

II is not a problem, but rather the relationship among firms in an industry with homogenous products is significant.

When comparing firm ratios with industry ratios, several problems may arise. Let's go through each option to understand the potential issues:

I. The firm under consideration may not be a typical firm in the industry. This statement highlights the fact that the firm being analyzed may have unique characteristics that differentiate it from the typical firms within the industry. These differences could be related to its business model, size, market segment, or other factors. Consequently, comparing the ratios of such a firm to the industry averages may not provide an accurate benchmark for evaluation.

II. The firm may be located in a homogeneous industry. This statement suggests that the industry in which the firm operates is relatively homogeneous, meaning that most firms within the industry have similar characteristics and operate in a similar manner. In such cases, the industry ratios may provide a reasonable benchmark for the firm under consideration. However, it is still important to consider other factors that could affect the firm's performance and ratios, such as its specific competitive position, management expertise, or unique strategies.

III. The firm may be multi-product, multi-industry in nature. If a firm operates across multiple product lines or industries, comparing its ratios to the industry averages becomes challenging. This is because the firm's performance and financial characteristics may be influenced by various factors that are specific to each product or industry segment. In such cases, it is crucial to analyze the firm's ratios within the context of each relevant industry or product line separately, rather than relying solely on industry averages.

IV. Industry ratios are difficult to calculate. This statement suggests that industry ratios are inherently difficult to calculate. However, industry ratios are typically available through various sources, including financial databases, industry reports, or regulatory filings. While there might be challenges in obtaining precise industry data, the availability of industry averages is not a significant problem in most cases.

Based on the above explanations, we can conclude that the problems with comparing firm ratios with industry ratios are primarily related to options I, III, and IV. Therefore, the correct answer is B. I, III & IV.