Question

Discuss the advantage as well as limits of ratio analysis for publicly traded corporations.
Please answer in 5-7 sentences.

Answer 1

Followings are the main advantage and limitations of ratio analysis for publicly traded corporations;

Advantages:

1. It helps in simplification of complex accounting figures so that all stakeholders can understand easily accounting figures of the corporations.

2. Ratio analysis helps in knowing the liquidity, solvency, profitability and operational efficiency in much easier way.

3. It helps in spoting strengths and weakness of the corporation.

4. Ratio analysis make intra-firm and inter-firm analysis much easier.

5. Ratio analysis also helps in better business forecasting etc.

Limitations:

1. Ratio analysis does not consider qualitative factors of the corporation.

2. It does not consider price level changes which is very important for the corporation.

3. If accounting information are incorrect then ratio analysis will result into misleading outcome.

4. Difficulty in setting single standard for ratio comparison.

5. Window dressing negatively affect ratio analysis and true financial analysis etc.