Ratios are mechanical and incomplete

Ratios are basically figures that represent an element’s value in terms of the other. These are one of the most used techniques of financial analysis. Typically, ratios are used to analyse the performance or for comparison purpose. However, it only gives the final figure but there is no clue about the other essential details. For instance, in case of profit margin ratio for 2 companies A and B, A can have more margins than B but the sales are less for A and so is the market price per share. These things do not get accounted for the ratio. Depending on a single ratio leads to an incomplete analysis based on half-knowledge only. It makes interpretation mechanical by limiting it to quantitative values. The context is not complete. However, ratios are good in providing the first-hand information about the performance of the company. There are also other limitations like the historical data in use, open to misinterpretation by a layman etc. Hence, ratios are mechanical and incomplete.

Leave a Reply

Your email address will not be published. Required fields are marked *


x

Related Posts

Evaluation of Transfer Pricing Policies
Introduction When one department of company manufactures some product which is supplied to another department of the company, transfer pricing i...
What is financial reconstructing
When a company cannot pay its cash obligations - for example, when it cannot meet its bonds payment or its payments to other creditors it goes ba...
Coffee Maker's Incorporated (CMI) - Transfer Pricing Example
Coffee Maker's Incorporated (CMI)Two divisions of a CMI are involved in a dispute. Division A purchases Part 101 and Division B purchases Par...
powered by RelatedPosts