Ratio Analysis: Frequently Asked Questions
QUESTION NO 1: WHAT REALLY IS RATIO ANALYSIS? |
Ratio analysis involves methods of calculating and interpreting financial ratios to assess a firm’s financial condition and performance. |
QUESTION NO 2: WHO IS INTERESTED IN RATIO ANALYSIS? |
Since it’s able to assess a firm’s financial condition and performance, hence it is of Interest to all users group as narrated in my earlier article on Users of the financial statements |
QUESTION NO 3: HOW MANY TYPES OF RATIO COMPARISONS CAN YOU USE? |
Ratio comparisons can be broadly classified into three types:
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QUESTION NO 4: DO YOU KNOW THAT RATIO ANALYSIS HAS CERTAIN LIMITATIONS? |
Ratios must be considered together |
Financial statements that are being compared should be dated at the same point in time. |
Use audited financial statements when possible. |
Merely numbers & data hard to get. |
Be wary of inflation distortions, historical cost, different accounting policies, management manipulation & different definitions. |
It is difficult to define categorically what a good or bad ratio value should be. |
QUESTION NO 5: DO YOU KNOW THERE ARE HOW MANY TYPES OF FINANCIAL RATIO CLASSIFICATION? |
Broadly classified under:
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CLICK HERE FOR MORE ARTICLES ON ACCOUNTING RATIO & INTERPRETATION OF FINANCIAL STATEMENTS
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