Effectiveness And Limitations Of Ratio Analysis

To analysis financial statements there are various tools. Ratio analysis is one of them. In ratio analysis we establish relationship between two or more items of financial statements and derive some vital information about the business.

Ratio analysis are useful tools when judging the performance of a company by weighing and evaluating the operating performance (Block-Hirt). There are 13 significant ratios that can separate by four main categories,

Ratios are highly important profit tools in financial analysis that help financial analysts implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although ratios report mostly on past performances, they can be predictive too, and provide lead indications of potential problem areas. Financial ratios are important because they help investors make decisions to buy hold or sell securities.

Ratio analysis will be used to measure the profitability, liquidity and efficiency of the named business and to analyse the performance of the business using ratio analysis.

Ratio analysis shows the correlation within certain figures of financial statements, like current assets and current liability, and is used for three types of company needs- within, intra- and inter-company. Association can be shown in proportion, rate, or percentage and can evaluate company’s liquidity, profitability, and solvency. Liquidity ratios show company’s ability to pay obligations and fulfill needs for cash; profitability ratios show wellbeing and success for the certain time period; and solvency ratios show company’s endurance over the years.

Ratio analysis: Perform trend and ratio analysis on current and fixed assets, current and long term liabilities, owner’s equity, sales revenues, EBIT, net income, and earnings per share. Project these trends

Ratio analysis are useful tools when judging the performance of a company by weighing and evaluating the operating performance (Block-Hirt). There are 13 significant ratios that can separate by four main categories,

Aerts and Walton (2013) expressed ratio analysis as connection between two elements of financial statements. According to them, ratios analysis allows to compare the incomparable elements in different companies. In other words, we may say that comparing profit on its own between two companies would not give a reliable conclusion on organisations’ profitability. If would simply ignore profit relationship with other financial elements like cost of goods, which itself affects the proportion of profit. This is where ratio analysis becomes a useful instrument. It allows us to draw the link between two different sales figures and two different cost of goods figures and eventually makes results comparable between two organisations. Lasher (2014) added that ratios are only valuable as a tool when they are compared with the ratios of other companies. To make investment decisions easier, we will compare industry averages later in the report.

The paper illustrates that financial ratio analysis is an important tool for firm’s to evaluate their financial health in order to identify areas of weakness so as to institute corrective measures.

The companies’ financial ratios can be compared with the ratios of other equivalent companies between business sectors at one point of time. These comparisons provide explanations on the relative financial status and performance of the company compared to the relative performance of its competitors. Comparisons are usually made with other companies in the same business sector and the benchmark is assumed to be the suitable value for a company. The assumption here is for the companies in the same business sector to have the almost identical financial ratios. If the ratio of a company shows a significant difference with the standard ratio, then further investigation must be done to find the cause of that difference. For evaluation, a

Secondary information is collected for this case. This case study limited only one techniques of financial analysis that is Ratio Analysis and also taken a single company. Thus the conclusion of the analysis carried out in a professional manner will be able to correctly describe the evaluation of the company and to substantiate the user’s decisions.

Financial ratio analysis is a valuable tool that allows one to assess the success, potential failure or future prospects of the company (Bazley 2012). The ratios are helpful in spotting useful trends that can indicate the warning signs of

Ratios describe the various relationships among accounts in the balance sheet and income statement. Financial ratios are important and helpful gauges of how an organization is functioning. An organization’s financial health, potential revenue, and even possible bankruptcy can be garnered from financial ratios. Information derived from financial statements is used to calculate most ratios and make projections. “Ratios help investors and lenders determine the risk associated with lending or investing funds in an organization” (GE Financial Healthcare Services, 2003, para 1). According to Finkler and Ward (2006), “the key to interpretation of ratios is benchmarks. Without a basis for comparison, it is

Ratio analysis is known as the analysis of the financial statement that used by the company to compare the statements within the years of the company itself, or with another companies. (Siddiqu, 2008)

Ratio analysis is a very powerful method of analyzing the status of a company by manipulating the audited financial statements. They are a yardstick of doing a performance evaluation of the firm’s financial condition. A deeper understanding of the ratios by an investor offers them more knowledge on the working of the firm and the best investment they can undertake. The financial ratio gives a relationship of two or more accounting variables through arithmetical expressions (Beck, 2009). They offer a standard for comparison of firms’ growth and performance as well as with competitors, more so, they offer the firm a clean bill of health.