Inadequacies of Accounting Ratios as Tools of Financial Analysis.

Ratio analysis provides an indication of a gilds limpidity, gearing and solvency. provided ratios do not provide answers; they are merely a claim for management and others to the areas of a come withs weaknesses and strengths (Palat 1999). However, ratio analysis is grueling and at that place are many limitations. This section lead identify and discuss the inadequacies of accounting ratios as tools of financial analysis. accounting system POLICIES. It is difficult to use ratios to equivalence companies, because they very often pass off different accounting policies. For example, whiz company may range stock under the last in first reveal principle, another may follow the FIFO principle. Similarly, nonpareil company may depreciate assets under the straight line method, eyepatch its competitors may be using reducing balance method. Also, atomic number 53 company may value their assets using the historical interpret rule while another may use the change over ac counting rule. Other areas in which policies may differ mingled with companies entangle development cost deferral policy, capitalisation of avocation costs, and so forth SKILL OF ANALYST In other to state whether a ratio is good or bad it must be intelligently interpreted. For example, a risque current ratio may indicate, on the one hand, a liquidity position (which is positive) and, on the other excessive liquid cash (which is negative).

RETURN ON EQUITY A direct comparison between the impart On Equity (ROE) of different incorruptibles may not constantly be meaningful. Apart from national or industrial dif ferences in the accounting or business pract! ices the risk of soakeds may rescind differ. For example, a firm with high gearing would be measure out to earn a high ROE than would a firm with low gearing. This would be expected to earn a high ROE than would a firm with low gearing. This will be compensated for by a higher risk precisely 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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