Question

what are the major strengths and weakness of using ratios to identify a company's financial condition? explain with examples

Answer 1

Major strength of using ratio to identify performance-

A. It will provide with the complete quantitative analysis of a company's performance

B. It will also help in reducing the time and calculating the various performance measure effectively

C. it is just not limited to profitability but it is also limited to solvency and liquidity and other aspect of business

D. it will be helpful in finding out the areas where the company is not performing well and it is helping in order to improve those performance areas.

Weaknesses of using ratio are as follows-

A. Ratios are no qualitative analysis and they will not be providing any qualitative measure.

B. Ratio the mostly based upon the past data and they are not futuristic in nature

C. Ratio analysis is only no guarantee for selection of best companies.

When looking at the strength we can example it through doing valuation using ratio analysis and taking investment decision and lending decision using the ratio analysis

If looking at the weakness we can example it through it will always be taking into past performance of the company and it is historical in nature.