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    Ratios for financial statement analysis - limitations

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    What are the limitations of using ratios for financial statement analysis? What are the benefits? Do different user groups focus on different ratios? Why? Which ratios would you use to analyze a company? Why?

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    Ratios for financial statement analysis

    What are the limitations of using ratios for financial statement analysis?

    Ratios are summaries and just indicate a potential problem area - to know more you have to follow up. Ratios may be misleading because of a one-time event (such as a large customer default, special inventory purchase, large sale throwing off cash right at year end, and so forth).
    Ratios may be misleading because the prior periods are different activities or segments of the business and so ratio shifts are appears high/low because of change in the business structure rather than a change to the financial circumstances/strengths/weakness of the firm. Ratios are limited when the amount are small because when a small amount changes, it can be a big percent and that can mislead one into thinking a large shift has occurred. Ratios are summaries and so they can ...

    Solution Summary

    Your response is 496 words, giving several limitations and benefits. The discussion talks about different needs for creditors and stakeholders leading them to use different ratios. Finally, the discussion talks about how the author analyzes a company (which ratios and in what order).

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