From the course: Running a Profitable Business: Understanding Financial Ratios

Historical data pitfalls and baseball

From the course: Running a Profitable Business: Understanding Financial Ratios

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Historical data pitfalls and baseball

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- Hi, Kay, I understand you're a huge baseball fan. - A huge fan. - So which is your favorite Major League team? - Oh, that's easy, the New york Yankees. The Yankees are the most successful baseball franchise in history, as of the end of 2013, they had won more world championships than any other team 27. The second most the Cardinals with 11, less than half as many. And Yankees arch-enemies, the Red Sox have only won eight World Series championships. - That's great, so how've the Yankees done recently, and how about those Red Sox? - Well, Yankees haven't won anything since 2009. And the Red Sox, won the World Series in 2013. - There you go, so it looks like you're putting too much weight on old historical performance and not enough on more recent performance. - Fine, but this is a financial analysis course, so let's talk about some financial facts. In 2014, for example, the Yankees had the second highest payroll in Major League Baseball, 204 million dollars. That was behind only the Los Angeles Dodgers, who had 235 million. - That's a good point, but with such a large payroll, why aren't the Yankees winning more games? - Oh wait, it's a complicated issue. Key injuries, an aging roster, some unfortunate hitting troubles at home. - Exactly, turns out in your discussion of the Yankees, you've highlighted some of the key points about the pitfalls of financial ratio analysis. - I have? - Yes you have. You have to be careful about putting too much weight on past performance. Those 27 long ago world championships. Make sure you give extra consideration to more recent data. Also most situations are much too complicated to be summarized in just one or two financial numbers such as player payroll. - Are there any other potential pitfalls in financial ratio analysis? - Oh, absolutely, let's talk about them.

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