A serious pitfall in the interpretation of financial ratios arises when a company, whose business is seasonal, ends its accounting year on March 31, while most companies in the same industry end their accounting period on December 31.

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This is because financial ratios may not accurately reflect a company's financial performance if they are analyzed with other companies using different accounting periods. Seasonal companies may have different levels of sales, expenses, and cash flows at different times of the year, and comparing their financial ratios with companies that have different reporting periods may not provide meaningful insights. To overcome this pitfall, analysts should adjust for the seasonal nature of the business and use industry-specific benchmarks that account for the timing of revenues and expenses.

A Serious Pitfall in the Interpretation of Financial Ratios Arises