Inadequacies of Accounting Ratios as Tools of Financial Analysis.

Ratio analysis provides an indication of a gilds limpidity, gearing and solvency. moreover ratios do not provide answers; they are merely a claim for management and others to the areas of a communitys weaknesses and strengths (Palat 1999). However, ratio analysis is tough and at that place are many limitations. This section result identify and discuss the inadequacies of accounting ratios as tools of financial analysis. accountancy POLICIES. It is difficult to use ratios to equivalence companies, because they very often accompany different accounting policies. For example, whiz company may pry stock under the last in first break principle, another may follow the FIFO principle. Similarly, nonpareil company may depreciate assets under the straight line method, darn its competitors may be using reducing balance method. Also, whiz company may value their assets using the historical follow rule while another may use the vary accounting rule. Other areas in which policies may differ mingled with companies overwhelm development cost deferral policy, capitalisation of avocation costs, etcetera 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 fork over On Equity (ROE) of different incorruptibles may not continuously be meaningful. Apart from national or industrial differences in the accounting or b usiness practices the risk of faithfuls may! filch differ. For example, a firm with high gearing would be respect to earn a high ROE than would a firm with low gearing. This would be expected to earn a higher(prenominal) ROE than would a firm with low gearing. This will be compensated for by a higher risk simply 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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