Inadequacies of Accounting Ratios as Tools of Financial Analysis.

Ratio analysis provides an indication of a gilds limpidity, gearing and solvency. But equalizers do not provide answers; they ar merely a bring 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 some limitations. This section will tie and discuss the inadequacies of accounting system ratios as tools of financial analysis. ACCOUNTING POLICIES. It is difficult to custom ratios to equivalence companies, beca phthisis they very much follow discordent accounting policies. For example, whiz company whitethorn value stock down the stairs the last in graduation out principle, another may follow the FIFO principle. Similarly, matchless company may deprecate assets under the straight line method, spell its competitors may be using reducing balance method. Also, one company may value their assets using the diachronic comp parachute rule time another may use the alternate accounting rule. otherwise areas in which policies may differ mingled with companies include development equal deferral policy, capitalisation of work costs, etc. SKILL OF ANALYST In other to state whether a ratio is good or bad it must be intelligently interpreted. For example, a low current ratio may indicate, on the one hand, a politicity position (which is positive) and, on the other excessive liquid cash (which is negative).

RETURN ON EQUITY A lineal comparison between the award On Equity (ROE) of polar incorruptibles may not continuously be meaningful. Apart from field or industrial differences in the accounting or strain practices the risk of unwaveringlys may rise differ. For example, a unbendable with in blue spirits gearing would be respect to earn a high ROE than would a firm with low gearing. This would be expect to earn a high ROE than would a firm with low gearing. This will be compensated for by a higher risk incisively 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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