Financial ratio analysis is a tool used by accountants and managers to simplify the financial statements. Some advantages of financial ratio analysis mentioned in Financial Ratio Analysis Assignment Help are given below: –
- One of the main advantages of financial ratio analysis is that it helps to compare the financial statements of two or more companies.
- It also helps the company by evaluating the trend analysis of a single company over a specific period of time.
- It helps in forecasting future business activities and so the management can plan accordingly.
- Budgeting is one of the main objectives achieved by financial ratio analysis. Financial ratios are used to estimate the company’s budgeted figures.
- Financial ratio analysis plays a vital role in inter-firm comparison. This comparison is carried out by using different financial ratios.
- It indicates the overall profitability of the firm and also its ability to meet the short-term and long-term obligations to its investors, creditors, etc.
- It simplifies the financial statement and makes it easy for the users to understand and grasp the information.
Limitations of Financial Ratio Analysis:
Along with many advantages, there are some limitations of financial ratio analysis. The limitations of financial ratio analysis highlighted in Financial Ratio Analysis Assignment Help are given below: –
- The limitations in the financial statements often affect the financial ratio analysis and it is one of its major disadvantages.
- It only explains information regarding the past and users are usually interested to know more about a current and future situation.
- Companies have their own accounting policies and it might affect the comparison of accounting data and accounting ratios of two or more companies. Accounting policies such as charging depreciation, valuation of inventories, etc. differ from company to company.
- While computing the financial ratios, an only quantitative analysis is highlighted while the qualitative factors are ignored.
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