Financial Ratio Analysis Essay

2.4 Usefulness of financial ratios in measuring and predicting performance:

This study assessed that an effective ratio with near optimal interpretation results in feasible investment decisions, corporate solvency and profit potential and a track down impact on economic growth .The basic objective of financial statements is simply to supply relevant and decision helpful information and facts to individuals who considered necessary such information in a manner competent to satisfy their aims as well as such objectives need to drive the method of measurement. Accounting information need to always point to making sure that users of the information receive the absolute minimum level of information and facts that is related and useful, reliable,

In spite of this, you can find certain circumstances, where ratios are misused which can guide the management to wrong direction. One of the drawbacks includes that ratio analysis is utilized on the basis of financial statements. Amount of constraints of financial statements could have an effect on the precision or quality of ratio analysis .Moreover, ratio analysis intensely depends upon quantitative facts and figures and it ignores qualitative data. In addition to this, it is merely utilized as a tool for assessing the performance of business activities but ratio analysis certainly possesses some latitude for window dressing (Ahmed, 2006).A major limitation is the fact that it makes comparison of ratios between enterprises which happens to be questionable on account of variances in methods of accounting operation and

On the other hand (Ahmed, 2006). Said that lack of information will severely limit analysis. As ratios are based on income financial accounts which are subject to the limitations of historical cost accounting. Further to this Inflation, differing bases for valuing assets, or specific price changes which can distort inter-company comparisons and comparisons made over time. In my opinion (Delen, Kuzey and Uyar, 2013) has better concluded the discussion upon limitation by pointing out inflation and historical costing