It is important to realize that ratios do not actually solve any problems; they merely highlight trends and exceptions that can then be acted upon. Definitions of ratios often vary from one analyst to another—for example, the quick ratio and the acid test. Some analysts refer to the ratio of current assets minus inventory divided by current liabilities as the quick ratio, while others refer to the same ratio as the acid test.
One school of thought uses the year-end balances for assets in ROA and equity and long-term debt in ROACE. Another school of thought recognizes that companies can manipulate this ratio by posting significant transactions at the year end, only to reverse them in the new year. They therefore use the average of those balances that will counter such practices. These differences in approach can lead to vastly...
