What are the benefits and disadvantges of using ratio analysis to evaluate performance?
Financial Statement analysis is designed primarily to assist investors and creditors in deciding where to place their scarce investment resources. It is also used to help management to know the performance of organization.
In financial analysis, we need qualitative information and try to read between the numbers. We have to ask all the right questions. Over the years, there are some ratios, which have become more popular and handy for rule of thumb analysis of financial statements. Our purpose in this note is not deride them but to advice the reader to use them properly to derive the correct results. Financial ratios are useful tools for evaluating solvency, profitability and liquidity. Used separately, or in combination, the income statement and balance sheet help interested parties to measure a company's current financial performance, and to forecast its profit and cash flow potential. We can use ratio analysis to try to tell us ...
This discusses the benefits and disadvantges of using ratio analysis to evaluate performance