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For Your Consideration

How Many Ratios Are Enough?

In our discussion of financial statement ratio analysis, we discussed $14$ ratios that are commonly$-$used to help interpret financial statement data. Although that may seem like a lot of ratios, our discussion just scratched the surface. For example, one of the most widely used sets of comparative data for hospitals, the Almanac of Hospital Financial and Operating indicators, published annually by Optum$360,$ provides data on more than $30$ financial ratios.

Without too much additional work, you could probably compile a list of $50$ financial ratios. Yet studies have shown that about $90$ percent of the information contained in financial statement can be uncovered using $10$ or so carefully selected ratios.

How many ratios do you think are enough? Does it matter how the ratios are selected? Is there a cost to using more ratios than necessary? What is the disadvantage of generating too much data?

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