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Ratio - Classification , Advantages and Limitations
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- 3. PROFITABLITY RATIOS • NET PROFIT •PRICE EARNING RATIO • OPRATING PROFIT MARGIN LIQUDITY RATIO • CURRENT RATIO • QUICK RATIO • CURRENT CASH DEBT COVER RATIO ACITIVY RATIO • INVENTORY TURNOVER RATIO • RECEIVABLES TURNOVER RATIO • ACCONTS PAYABLE TURNOVER RATIO SOLVANCY RATIO • DEBT TO EQUITY RATIO • CURRENT ASSETS TO EQUITY RATIO • CAPITAL GEARING RATIO
- 4. CLASSIFICATION OF RATIOSBY STATEMENT BALANCE SHEET PROFIT&LOSS ACCOUNT MIXED STATEMENT 1 CURRENT RATIO 2 LIQUD RATIO 1 GROSS PROFIT RATIO 2 OPRATING RATIO 1 STOCK TURNOVER RATIO 2 DEBTORS TURNOVER RATIO
- 5. LIMITATION OF RATIOANALYSIS RATIOS ARE BASED ON HISTORICAL (OLD) DATA:OLD FINANCIAL REPORT ARE USED AND THERE IS NO GUARANTEE THAT PAST RESULT WILL BE CORRESPOND TO FUTUR RESULTS, e.g. RATIOS FOR 2015WILL BE BASED ON 2014 FIGURES USE OF HISTORICAL COST ACCOUNTING:HOW RELEVANT IS THE INFORMATION IN THE REPORTS WHEN IT IS BASED ON HISTORICALCOST DATA ? DEFINITION ON ASSET VALUES OVER TIME IS NOT CONSIDERED. CHANGES IN ACCOUNTING METHODS (COMPARABILITY):TO MAKE INFORMATION MORE RELEVENT, MANAGEMENT MAY CHANGE ACCOUTING METHODS OVER TIME
- 6. THE LIMITATIONS OFRATIO ANALYSIS PICKING AN INDUSTRY BENCHMARK CAN SOMTIME BE DIFFICULT PUBLISHED PEER-GROUP OR INDUSTRY AVERAGES ARE NOT ALWAYS REPRESENTATIVE OF THE FIRM BEING ANALYZED AN INDUSTRY AVERAGE IN NOT NECESSARILY DESIRABLE TARGET OR NORM ACCUNTING PRACTICES DIFFER WIDELY AMONG FIRMS MANY FIRM EXPERIENCE SEASONAL CHANGES IN THEIR OPERATIONS
- 7. FORECASTING: ITHELPS IN BUSINESS PLANNING, FORECASTING AND FUTURE PLANNIG LOCATING THE WEAK SPOTS: RATIO ARE OF GREAT ASSISTANCE IN LOCATION THE WEEK SPOTS IN THE BUSFIRMINESS EVEN THOUGH THE OVERALL PERFORMANCE MAY BE QUIT GOOD. INTER-FIRM AND INTRA-FIRM COMPARISON: A FIRM WOULD LIKE TO COMPAR ITS PERFORMANCE WITH THAT OF OTHER FIRMS AND OF INDUSTRY IN GENERAL(INTER-FORM, COMPARISON)AND THE PERFORMED OF DIFFERENT UNITS BELONGING TO THE SAME FIRM (INTRA-FIRM COMPARITION).
- 8. ADVANTAGES OF RATIOANALYSIS IT SIMPLIFIES FINANCIAL STATEMENT IT HELPS IN COMPARING COMPANIES OF DIFFERENT SIZE WITH EACH OTHER IT HELPS IN TREND ANALYSIS WHICH INVIOLVS COMPARING A SINGLE COMPANY OVER A PERIOD IT HIGHLIGHTS IMPORTANT INFORMATION IN A SIMPLE TO USE FORM QUICKLY
- 9. FINANCIAL STATEMENT ANALYSIS TOMAKE INFORMED DECISIONS ABOUT A COMPANY * HELPFUL IN MANAGEING THE COMPANY * COMPARITION WITH COMPETITION * ESTABLISH FINANCIAL HELTH * USED FOR INVESTEMENT DECISIOS GENERALLY BASED ON COMPARATIVE FINANCIAL DATA *FORM ONE YEAR TO THE NEXT * WITH A COMPETING COMPANY * WITH THE INDUSTRY AS A WHOLE
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