Benefits And Limits Of Financial Ratio Analysis In Financial Analysis

2019 Words 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
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As early as 300 B.C., works citing the necessity and uses of the ratio analysis was found through the book Elements, Book V, written by Euclid. In addition, Alexander Wall created and presented the ratio analysis system in 1909, which became the starting point of all the effort to develop a universal formula for the entire industry (Stenback 2013). Nevertheless, the technique gained popularity during the later part of the 19th century when the US economy began its transformation from industrialization to privatization, management acknowledged the need for the issuance of the financial statements (Horrigan, 1968, p284). However, it was Benjamin Graham, who was called the Father of Fundamental Analysis, who created the basic ratio analysis formula. His formula helps in defining company health and position, as well as the management concept (ASA

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