Question

“Financial Ratios calculated and analysed in a particular situation depend on the user of the financial statements” – Expound the advantages and limitations of ratio analysis

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Answer 1

Advantages of ratio analysis
1. It is very simple to calculates and doesnot include complex calculation.
2. Helps to quickly identify any problems and compares it with industry standards. Helps to identify profitability, operation efficiency liquidity,solvency and debt repaying capacity.
3. It helps in easy comparison with competitors's financial performance.

Disadvantages of ratio analysis
1. Ratio analysis is done on historical data and used to predict future performance which is not reliable.
2. If there is window dressing of the financial statements then ratios become manipulated and can give misleading results.
3. They only point out problems and don't provide solutions to problems.

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