Benefits And Limitations Of Ratio Analysis Essay

2019 Words Jan 28th, 2015 9 Pages
Benefits and Limitations of Ratio Analysis In order to make economic decisions, business owners and investors need to gather information, summarize the details, and interpret the results of the data. It is the basic flow of the accounting cycle wherein the products are the financial statements, which the management prepares and issue for the use of the public. Furthermore, performance of other financial analysis techniques could help users of the financial report evaluate the overall performance of the target company. Among these techniques is the financial ratio analysis.
Ratio Analysis
Definition
According to V. S. Bagad (2008), ratio analysis is a process by which figures in the financial statements are interpreted and analyzed using a mathematical computation (p8-1). Since financial reports contain raw data, ratio analysis provides the users a more detailed meaning and significant information on the company’s strengths and weaknesses. Meanwhile, Khan and Jain (2007) defined ratio analysis as “a systematic use of ratios to interpret or assess the firm’s status or performances (p6-2).” It is a process of comparing related information that was already presented on the financial statements. It is also one of the quantitative tool that financial analysts uses in order to define the profitability level of the company, the efficiency of asset utilization, and the capacity of the firm to pay current and long-term obligations.

History The use of the ratio analysis in…

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