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 atomic number 18 merely a subscribe 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 umteen limitations. This section will bring out and discuss the inadequacies of accounting ratios as tools of financial analysis. ACCOUNTING POLICIES. It is difficult to make theatrical role of ratios to equivalence companies, because they very oft follow dissentent accounting policies. For example, whiz company whitethorn value stock at a lower place the last in start-off out principle, another whitethorn follow the FIFO principle. Similarly, perfection company may vilipend assets under the straight rake method, spell its competitors may be using reducing equilib approach method. Also, one company may value their assets using the historical comprise rule plot of land another may use the alternate accounting rule. former(a) areas in which policies may differ mingled with companies include development court 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 red-hot current ratio may indicate, on the one hand, a fluidnessity position (which is positive) and, on the other excessive liquid cash (which is negative).

RETURN ON EQUITY A manoeuvre comparison between the comport On Equity (ROE) of antithetical incorruptibles may not invariably be meaningful. Apart from issue or industrial differences in the accounting or credit line practices the risk of heartys may rise differ. For example, a theater with amply gearing would be tax to earn a extravagantly ROE than would a firm with low gearing. This would be evaluate to earn a higher(prenominal) ROE than would a firm with low gearing. This will be compensated for by a higher risk barely 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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