Contemporary Financial Management
14th Edition
ISBN: 9781337090582
Author: R. Charles Moyer, James R. McGuigan, Ramesh P. Rao
Publisher: Cengage Learning
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Question
Chapter 3, Problem 1QTD
Summary Introduction
To discuss: Limitations of ratio analysis as a measure of financial statement analysis.
Expert Solution & Answer
Explanation of Solution
The limitations of the ratio analysis are as follows,
- Ratios cannot be calculated effectively when the numerator and denominator have opposite signs.
- If denominator can be zero, then the interpretation of ratios is meaningless.
- It may not capture the changing strategy of the company, and hence an analyst could miss the crucial changes in the enterprise design.
- It cannot be useful for better understanding during extraordinary periods like a period of low growth or high growth.
- Ratios can be used as a standalone figures, this must have used previous year’s ratios for comparison purposes.
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Students have asked these similar questions
What is the limitation of Financial Statement Analysis?
Which of the following is not a common tool used in financial statement analysis?
Group of answer choices
a) Credit analysis
b) Common-size statement analysis
c) Ratio analysis
d) Random walk analysis
How is the the financial ratio analyses very useful?
Chapter 3 Solutions
Contemporary Financial Management
Ch. 3 - Prob. 1QTDCh. 3 - Prob. 2QTDCh. 3 - Prob. 3QTDCh. 3 - Prob. 4QTDCh. 3 - Prob. 5QTDCh. 3 - Prob. 6QTDCh. 3 - Prob. 7QTDCh. 3 - Prob. 8QTDCh. 3 - Prob. 9QTDCh. 3 - Prob. 10QTD
Ch. 3 - Prob. 11QTDCh. 3 - Prob. 12QTDCh. 3 - Prob. 13QTDCh. 3 - Prob. 14QTDCh. 3 - Prob. 1PCh. 3 - Prob. 2PCh. 3 - Prob. 3PCh. 3 - Prob. 4PCh. 3 - Prob. 5PCh. 3 - Prob. 6PCh. 3 - Prob. 7PCh. 3 - Prob. 8PCh. 3 - Prob. 9PCh. 3 - Prob. 10PCh. 3 - Prob. 11PCh. 3 - Prob. 12PCh. 3 - Prob. 13PCh. 3 - Prob. 14PCh. 3 - Prob. 15PCh. 3 - Prob. 16PCh. 3 - Prob. 17PCh. 3 - Prob. 18PCh. 3 - Prob. 19PCh. 3 - Prob. 20PCh. 3 - Prob. 21P
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Similar questions
- . Which one of the following is not a tool in financial statement analysis? a. Horizontal analysis O b. Circular analysis c. Vertical analysis d. Ratio analysisarrow_forwardWhich of these are not the method of financial statement analysis a. Ratio Analysis b. Comparative Analysis c. Trend Analysis d. Capitalisation Methodarrow_forwardWhat is the purpose of financial statement analysis?arrow_forward
- What are some of the problems is using AFN equation to estimate AFN rather than the pro-forma financial statement method?arrow_forwardDistinguish between ratio analysis and percentage analysis relative to the interpretation of financial statements. What is the value of these two types of analyses?arrow_forwardWhat factors are frequently ignored in financial analysis? Why?arrow_forward
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