Ratios for financial statement analysis - limitations
Not what you're looking for?
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?
Purchase this Solution
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).
Solution Preview
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 ...
Education
- BSc, University of Virginia
- MSc, University of Virginia
- PhD, Georgia State University
Recent Feedback
- "hey just wanted to know if you used 0% for the risk free rate and if you didn't if you could adjust it please and thank you "
- "Thank, this is more clear to me now."
- "Awesome job! "
- "ty"
- "Great Analysis, thank you so much"
Purchase this Solution
Free BrainMass Quizzes
Balance Sheet
The Fundamental Classified Balance Sheet. What to know to make it easy.
Understanding the Accounting Equation
These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.
Paradigms and Frameworks of Management Research
This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.
Team Development Strategies
This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.
Operations Management
This quiz tests a student's knowledge about Operations Management