FINANCIAL RATIO ANALYSIS 1
Financialratio analysis provides an approximation of the financial conditionof a company. This is done by doing comparisons against thehistorical figures of the company, successful businesses and industrycompetitors. The financial statements make one be in a position toknow how the company is fairing and whether it is effective incarrying out its business. There are different types of ratios forinstance the current ratio, quick ratio and also the absoluteliquidity ratio.
Ratioswhich are sometimes called trend analysis are critical as they areused to make company’s decisions as to its trends and the practicesthat should be abandoned as business entity. One of the things thatshould be considered in regards to the ratios is appropriateallowances of changes in the company’s policies especially when itcomes to other industries and the company’s norm.
Inperformance of ratio analysis, the figures ought to be adjusted tocommon size numbers such that they are all expressed in percentageand that the data for the companies was taken comparatively the sametime using the same classification procedures.
Themanagers and executives of a company also use financial ratioanalysis to tell whether their company can survive in a crisis giventhat the comparisons are done among the small and big companies whichengage in the same type of business.
Thoughfinancial ratio analyses are advantageous to the company, they havesome limitations. For instance they dwell mostly on the past whilethe concerns are necessarily current and future and that they do notconsider the fact that industries are located in different locationsthus having different business environments. In this regard, oneindustry could be strategically located in a better environment thatthe other.
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