# Ratios

When to use averages ie. begin and end/2 instead of just using the current year? Will the question specify or will we be expected to use averages when given that level of detail.

The Ratios are different for corp finance and FRA

Usually when the numerator is also bound by the effects of total and the marginal change of the denmoinator.

For example, in the ROE forumla, net income is dividied by the average BV of equity. If you instead used the end value of this year’s equity divided by the net income for the year, you might underestimate the ROE because a big part of the income might have been derived under lower capital than the end of year value. Since the total net income you generate at the end of a fiscal year is a continous supply throughout the year, then it would be inaccurate to base that value on just the end value of equity, assuming it has significantly changed.

For exam purposes, both are correct. If the question gives you the beg and end values in such ratios, you should use the average. If you are only given the end values, then using that is enough.

My generaly rule is if you have one income statement stat and one balance sheet stat, use the average for the balance sheet stat.

If numerator and denominator are the same, then no average is required.

And a good rule it is.

(And you can substitute “cash flow” for “income” in that rule, too.)