Financial Ratio Analysis







Financial Ratio Analysis

















Financial Ratio Analysis


Financial ratios are used for general purposes such as to assess the firm’s ability to

Meet its debt in time, measure of the firm’s progress and as a measure of how successful a given manager is. Moreover, financial ratio measures a certain organization or company’s stability, liquidity, operational efficiency, and profitability. It is through this analysis that investors gain the total knowledge and facts that are necessary in order to determine whether to do business with a certain given firm (Barnes1987).

Advantages of Ratio Analysis

Help in undertaking the trend analysis of a certain company. Financial analysis has been used by analyst and accountants to predict the stability of a given firm in the future. For instance, it possible to estimate the profits that could be made in the future and foretell disasters such as corporate failure. This is possible through risk assessment and use of financial hypothesis. The other advantage of ratio analysis is that it is used in controlling factors that relate to industrial activities. It states that in practical, the difference between given industrial norm and a certain firm ratio can be useful whenever comparing two companies (Edmister 1972).

Disadvantages of Ratio Analysis

On the limitation side, any financial information on ratio analysis is affected by the use of estimates and assumptions. In accounting, different policies are used making ratio analysis less useful. In addition, ratio analysis tends to dwell much in the past data and inform whereas most investors tend to mind about the future and the current company state. These results at a time to lack of convincing information or facts that compels as certain investor to endorse the kind of production that is undertaken.


Barnes, P. (1987). The analysis and use of financial ratios: a review article. Journal of Business Finance & Accounting, 14(4), 449-461.

Edmister, R. O. (1972). An empirical test of financial ratio analysis for small business failure prediction. Journal of Financial and Quantitative Analysis, 7(02), 1477-1493.


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