Why might an analyst pay more attention to average balance values in looking at a seasonal or growing firm than when studying a firm that remains constant throughout the year?
Many ratios involve comparison of income statement and balance sheet numbers. However, there is a natural incompatibility between these numbers since the income statement describes the entire year while the balance sheet is a snapshot taken at one point in time. If a firm is seasonal or growing, its balance sheet numbers will change throughout the year, and the numbers taken at one time point may not accurately reflect the firm’s use of assets or financing for the entire year. By averaging balance sheet values, an analyst can produce more representative numbers to compare against figures from the income statement.
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