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In Managerial Finance’s Chapter 3, states: Financial ratios enable managers to monitor the pules of the...

In Managerial Finance’s Chapter 3, states: Financial ratios enable managers to monitor the pules of the firm and its progress toward its strategic goals. In your opinion do you think…

this work all of the time?

Is it foolproof?

Do they give us a view into the future?

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Answer #1

Financial ratios help in presenting managers with an idea of the overall financial performance of the company in the past and an expectation of the performance of the company on the financial front in the future.

No, these are never foolproof ratios because these are only quantitative ratios, they do not include the qualitative aspect in relation to a firm, because there are various types of qualitative factors which contribute to the major risks of the company which are very difficult to quantify, so financial ratios, because of their inability to account for qualitative factors, they are never the fullproof ratios for the performance of company.

This can be exampled through effect of coronavirus on the financial statements of the company which can never be predicted by measurement through financial ratios.

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