Advantages and Disadvantages of Ratio Analysis as a Measure of Company Perform
Financial ratios are variables that are obtained from two items in the financial statements with the aim of developing a deeper meaning of the financial elements. These ratios have been used for many purposes leading to many benefits. However, limitations that come along with the ratios which are making the ratios less reliable.
Advantages of using Financial Ratios
Financial ratios have the capacity of simplifying the huge data presented in the balance sheet, cash flow and the income statement (Subbarayan, Raj, Antony & Jothikumar, p.233). This is because; the ratios depend on just two elements to be compared. This has been found to save a lot of time and resources when trying to understand the business position.
Additionally, the use of these ratios allows a perfect comparison between two businesses of different sizes as far as they operate in the same industry (Wong & Joshi, p. 27). In establishing the extent of borrowing of a company, the two companies (despite their sizes) can use their liabilities and assets and by this one may be able to choose the most reliable one
More so, these ratios are the foundations of decision making. They help in the identification of the weakest points of the business and create insight on where improvements need to be made (Wong & Joshi, p.27).
Disadvantages of Financial Ratio…
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