LIMITATION OF RATIO ANALYSIS Although the ratio analysis helps a business firm in many factors it’s also has its own limitation. The companies should consider on the limitation in order to avoid any mistakes. First of all, all the information that uses in derived ratio analysis is from actual past company performance result. This does not mean in future the result may same or carry forwarded. However, it still can be use as a standard document or reference and do make comparison in order to keep the consistency.
Accounting analysis techniques used in this research report are 1. Trend analysis focusing on the operating income and net profit 2. Ratio analysis on profitability, liquidity, solvency and efficiency and comparison of ratios with industry competitors. Trend Analysis: Trend analysis is used to reveal the trend of items for a certain period and is used in combination with ratio analysis to spot a particular trend, explore the causes for the trend and make necessary preparation for future projections (Vishal and Anchal, 2015). Ratio Analysis: Ratio analysis is the technique of calculating a number of accounting ratios from the figures found in the financial statements, and then compare the ratios with those of previous years or similar activities,
Thus, in the final analysis, the usefulness of ratio is wholly dependent on their intelligent and skilful interpretation. Advantages or Uses of ratio analysis: 1) It helps in budgetary control. 2) It facilitates the inter-firm and intra-firm comparison. 3) It helps in standard costing. 4) It is helpful to the management for decision making.
The liquidity position of a firm would be satisfactory if it is able to meet its current obligations when they become due the liquidity ratios are particularly useful in credit analysis by banks and other supplier of short–term loans. Long-term solvency: Ratio analysis is equally useful for assessing the long term financial viability of the firm the long term solvency is measured by the leverage / capital structure and profitability ratios, which focus on earnings power and operating efficiency ratio analysis, reveals the strength and weakness of a firm in this respect. Operating efficiency: It is relevant from the viewpoint of management and it throws light on the degree of efficiency in the management and utilization of its assets. The ultimate analysis depends upon the sales revenue generated by the use of its assets total as well as its components. Overall profitability: In this the management is constantly concerned about the overall profitability of the enterprises.
Introduction Working capital management plays a vital role to the survival of firms, has a direct impact on profitability and liquidity of company (Raherman & Nasr, 2007). According to Investopedia, working capital management is a measure of the performance and short-term financial strength of the firm. Working capital includes that part of the assets of a business are used in the current operation. It includes cash, accounts receivable and inventory. These types of assets are usually temporary.
The problem of cannot find a good job leads to lack of human capital and this leads to less productivity in society. Productivity is important in our society because productivity is used to determine the living standards in a nation. Productivity is the efficiency in which we convert inputs into outputs in our society where it can be affected by environment and lack of resources (D., 2006). Thus, it could affect everyone’s living standard in a society. Furthermore, human capital is not only about education or job experience, in fact, many other factors such as health and personality traits like determination are highly likely to change an economy circumstances.
But despite it’s being indispensable, the ratio analysis suffers from a number of limitations. These limitations should be kept in mind while making use of the ratio analysis:- False accounting data gives false ratios:- Accounting ratios are calculated on the basis of given data given in profit and loss account and balance sheet. Therefore, they will be only as correct as the accounting data on which they are based. For example, if the closing stock is over-valued, not only the profitability will be overstated but also the financial position will appear to be better. Therefore, unless the profit and loss account and balance sheet are reliable, the ratios based on them will not be reliable.
This ratio analysis can be used to assess financial strength and weakness of a business as well as a platform to make financial decisions. It can also use for budgetary, future planning and comparison purposes. Once the financial ratios been calculated, non-finance background people including stakeholders, lenders, management, and investors will be able to comfortably mingle with finance statistics as it will highlight the necessary information of the company rather than go through the whole financial report. According to Fraser and Ormiston (2004) financial analysis can be categorized by four types of ratios which are liquidity ratio, profitability ratio, efficiency ratio and leverage ratios. However, despite the advantages of ratio analysis, certain limitations will make it less meaningful.
Financial management describes the proficient and valuable management of money (resources) in such a approach as to get done the goals of the organization. It is the particular function directly connected with the top board executive. The importance of this function isn 't always seen inside the 'Line ' however additionally in the potential of 'staff ' in average of a organization. it has been described in another way through one of a kind specialists within the discipline. The term normally applies to an enterprise or enterprise 's monetary strategy, while individual finance or financial life management refers to an individual 's management approach.