2.4 Usefulness of financial ratios in measuring and predicting performance: This study assessed that an effective ratio with near optimal interpretation results in feasible investment decisions, corporate solvency and profit potential and a track down impact on economic growth .The basic objective of financial statements is simply to supply relevant and decision helpful information and facts to individuals who considered necessary such information in a manner competent to satisfy their aims as well as such objectives need to drive the method of measurement. Accounting information need to always point to making sure that users of the information receive the absolute minimum level of information and facts that is related and useful, reliable, …show more content…
In spite of this, you can find certain circumstances, where ratios are misused which can guide the management to wrong direction. One of the drawbacks includes that ratio analysis is utilized on the basis of financial statements. Amount of constraints of financial statements could have an effect on the precision or quality of ratio analysis .Moreover, ratio analysis intensely depends upon quantitative facts and figures and it ignores qualitative data. In addition to this, it is merely utilized as a tool for assessing the performance of business activities but ratio analysis certainly possesses some latitude for window dressing (Ahmed, 2006).A major limitation is the fact that it makes comparison of ratios between enterprises which happens to be questionable on account of variances in methods of accounting operation and …show more content…
On the other hand (Ahmed, 2006). Said that lack of information will severely limit analysis. As ratios are based on income financial accounts which are subject to the limitations of historical cost accounting. Further to this Inflation, differing bases for valuing assets, or specific price changes which can distort inter-company comparisons and comparisons made over time. In my opinion (Delen, Kuzey and Uyar, 2013) has better concluded the discussion upon limitation by pointing out inflation and historical costing
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Financial ratios are "just a convenient way to summarize large quantities of financial data and to compare firms' performance" (Brealey & Myer & Marcus, 2003, p. 450). Financial ratios are very useful tools in order to determine the health of a company, help managers to make decision, and help to compare companies that belong to the same industry in order to know about their performance.
Ratio analysis is a widely used of financial analysis. It is defined as the systematic use of ratio so that the financial statements can be interpret to find a firm’s strengths and weakness as well as its historical performance and current financial condition. Ratios reveal the relationship in a more meaningful way so as to enable us to draw conclusions from them.
...formance of the organization. There can be numerous ratios that can be taken out using the available financial data. It is very important for financial data to be correct for correct computation and analysis of data. The choice of ratio depends on the kind of organization and the kind of information we have.
Ratio and Financial Statement Analysis can be seen as a means to an end i.e. Ratio analysis is a financial tool to derive a Financial Statement. Financial Analysis are accounting reports in respect of economic activities prepared periodically to measure the performance of the business. It could also be said to be the analysis established for evaluating the performance of companies. Such criteria are used as parameters in deciding whether the organisation is performing satisfactorily or not. The instrument used for financial Statement Analysis are:
The ratio of 1.7 for the last two years indicates consistency, although a lower number is preferred. As a company produces high value product, this could be a satisfactory ratio. By comparing it to 2011 when a ratio was 2.9, in the last two years a ratio improved
The ratios can, therefore, be used as an appropriate budgetary control and group co-ordination. In most cases, the financial ratios are used to analyze financial trends while comparing one group’s performances to the other regarding financial. Financial ratio analysis is used to conduct financial forecasting for future financial situations like bankruptcy. The financial ratios that were used to evaluate the suitability for an investment in Apple Inc. Include earning per share, current ratio, quick ratio and price earnings ratio (Morgan & Stocken,
Ratio analysis is one of the most important and powerful tool in analyzing the financial position of the company where ratios are applied for evaluating the financial condition and act of the firm. Investigation and understanding of different accounting ratios gives a clear study and a better understanding of the financial position of the firm
I have leant that ratio analysis offers better insight of a company’s financial position on the short-term and long-term basis. However, I would recommend that investor advice should be based on ratio analysis that considers ratios from several years. This will ensure that the investor is making an informed decision based on the company’s financial ratio performance trend.
Interpretation can be misleading as one ratio might suggest a positive aspect or strong point of the company yet digging deeper will only situation is quite on the opposite of what appears to be.
They help to establish the performance and state of a firm’s operations that would otherwise not be reflected by individual item in the financial statements (Ittelson, 2009). The ratios help in identifying different aspects of a firm’s performance including profitability, liquidity, and financial leverage of a firm among others. This article determines the profitability, liquidity and the financial leverage of Coca-Cola Company.