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Title: FINANCE RATIO ANALYSIS - Users, limitations, utilization and Categorization of ratios
Description: This document helps to FINANCE RATIO ANALYSIS and understand Users, limitations, utilization and Categorization of ratios
Description: This document helps to FINANCE RATIO ANALYSIS and understand Users, limitations, utilization and Categorization of ratios
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FINANCE RATIO ANALYSIS - Users, limitations, utilization and
Categorization of ratios
What is finance ratio analysis?
Ratio analysis is a valuable tool for obtaining meaningful information through
comparison
...
Additionally,
comparing ratios between similar businesses allows for an assessment of
whether the company being analyzed is performing better or worse than the
average within its industry
...
They focus on factors such as dividends, market
prices, and the level of debt versus equity
...
Therefore, they want to assess the liquidity of the business
...
Limitations of ratio analysis
While ratio analysis can be a valuable technique, it is crucial to acknowledge
its limitations
...
Figures for supposedly "similar"
companies may offer better guidance, but identifying these companies and
obtaining detailed information about them can pose challenges
...
(c) Ratios are not definitive
"Ideal levels" of ratios differ across industries, and even these levels are not
absolute
...
(d) Need for careful interpretation
For instance, when comparing liquidity ratios of two businesses, one may
have higher levels
...
(e) Manipulation
Any ratio, including profit ratios, can be distorted by the choice of accounting
policies
...
(f) Other information
Relying solely on ratio analysis is insufficient for interpreting company
accounts
...
We will explore this further below
...
Financial analysis using statements is not an exact science
...
Published accounts generally provide summarized information, and more
detailed data may be necessary to make well-informed decisions
...
It is important to keep in mind
that figures like 'profit' and 'net assets' are somewhat arbitrary and can be
influenced by manipulation
...
Furthermore, comparability may be compromised when
estimates and judgments are utilized
...
Categorization of ratios
It is worth noting that ratios can be classified into the following four
categories:
• Profitability and return
• Debt and gearing
• Liquidity: management of cash and other working capital items
• Shareholders' investment ratios (or 'stock market ratios')
Title: FINANCE RATIO ANALYSIS - Users, limitations, utilization and Categorization of ratios
Description: This document helps to FINANCE RATIO ANALYSIS and understand Users, limitations, utilization and Categorization of ratios
Description: This document helps to FINANCE RATIO ANALYSIS and understand Users, limitations, utilization and Categorization of ratios