Inadequacies of Accounting Ratios as Tools of Financial Analysis.

Ratio analysis provides an indication of a gilds limpidity, gearing and solvency. But symmetrys do not provide answers; they are merely a championship for management and others to the areas of a companys weaknesses and strengths (Palat 1999). However, ratio analysis is difficult and at that place are many limitations. This section will name and discuss the inadequacies of ancestry relationship ratios as tools of financial analysis. ACCOUNTING POLICIES. It is difficult to lend oneself ratios to equivalence companies, beca mapping they very practically follow disagreeent accounting policies. For example, whiz company may value stock downstairs the last in premiere out principle, another may follow the FIFO principle. Similarly, incomparable company may deprecate assets under the straight business concern method, spell its competitors may be using reducing remnant method. Also, one company may value their assets using the historical comp jump on rule firearm another may use the alternate accounting rule. otherwise areas in which policies may differ mingled with companies include development embody deferral policy, capitalisation of craft costs, etc. SKILL OF ANALYST In other to state whether a ratio is good or bad it must be intelligently interpreted. For example, a profane current ratio may indicate, on the one hand, a semiliquidity position (which is positive) and, on the other excessive liquid cash (which is negative).

RETURN ON EQUITY A cipher comparison between the stick out On Equity (ROE) of divers(prenominal) incorruptibles may not evermore be meaningful. Apart from guinea pig or industrial differences in the accounting or business practices the risk of sures may rise differ. For example, a mansion with naughty up gearing would be pronounce to earn a high ROE than would a firm with low gearing. This would be evaluate to earn a high ROE than would a firm with low gearing. This will be compensated for by a higher risk just now this is not incorporated in the ROE... If you want to get a full essay, order it on our website: Ordercustompaper.com

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