Question

Pick one financial ratio and discuss its benefits and detriments.

Answer 1

Let's discuss Current ratio

Benefits

It helps to measure the liquidity condition of the company. And answers to the question whether company will be able to pay its current liabilities.

It helps in understanding how cash rich is company.

It also gives idea about operating cycle of the company as in how efficiently products are created and sold

Disadvantage are that it can't standalone tell the liquidity of the company. It involves inventory in its calculations and inventory management can lead to overstatement of this ratio to show better position.

It varies with the change in sales. So with seasonal sales , as sales vary this ratio varies and thus don't show consistent performance.