The Usefulness And Limitations Of Financial Ratios

1294 WordsFeb 9, 20156 Pages
Discuss the usefulness and limitations of financial ratios in evaluating the performance and management of companies Financial ratio is a combinations of ratios, that are formed from a variety of figures from financial statement using the technique ratio analysis. In order to assess the company’s performance. In this essay financial ratio would be split into six categories: profitability, activity, liquidity, gearing and market ratios. In order to discuss the usefulness and limitation on evaluating the performance of the company ,while using figures from EasyJet’s 2013 annual report. Profitability ratio shows the company’s ability to generate an adequate return on invested capital(John j wild).The purpose of this ratio to attract investor for extra funding because it enable them to examined the liquidity position and equity finance(paul d kimmel) from assets turnover ratio which gives an indication of the rate of return that was generated from a variety of assets the company has, managers can also use this ratio to improve efficiency of operation because it enable them to identify area where there is problems(david alexander).Even though, it can identify problems but it cannot explain how it occurred. One of the most significant profitability ratio is return on capital employed, measures the firms effectiveness in generating profit from the capital for the shareholders(anna Abraham).However due to fluctuation in profit is hard to calculate due to its difficult to decide

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