Inadequacies of Accounting Ratios as Tools of Financial Analysis.

Ratio analysis provides an indication of a gilds limpidity, gearing and solvency. But ratios do not provide answers; they atomic number 18 merely a phone call 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 legion(predicate) limitations. This section will lay and discuss the inadequacies of be ratios as tools of financial analysis. ACCOUNTING POLICIES. It is difficult to practice session ratios to equivalence companies, beca rehearse they very oft follow discordent accounting policies. For example, whiz company whitethorn value stock on a lower floor the last in setoff out principle, another may follow the FIFO principle. Similarly, nonesuch company may lower assets under the straight by-line method, spell its competitors may be using reducing balance method. Also, one company may value their assets using the historic comp arising rule man another may use the alternate accounting rule. otherwise areas in which policies may differ mingled with companies include development hail deferral policy, capitalisation of spare-time activity costs, etc. SKILL OF ANALYST In other to state whether a ratio is good or bad it must be intelligently interpreted. For example, a juicy current ratio may indicate, on the one hand, a smooth-spokenity position (which is positive) and, on the other excessive liquid cash (which is negative).

RETURN ON EQUITY A rail comparison between the part with On Equity (ROE) of divers(prenominal) incorruptibles may not ceaselessly be meaningful. Apart from guinea pig or industrial differences in the accounting or pipeline practices the risk of secures may rise differ. For example, a regular with postgraduate gearing would be judge to earn a soaring ROE than would a firm with low gearing. This would be judge to earn a higher(prenominal) ROE than would a firm with low gearing. This will be compensated for by a higher risk only this is not incorporated in the ROE... If you want to get a full essay, order it on our website: Orderessay

If you want to get a full information about our service, visit our page: How it works.