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discuss the advantage as well as limits of ratio analysis for publicly traded corporations

discuss the advantage as well as limits of ratio analysis for publicly traded corporations

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Expert Solution

Advantages :
1. It helps in comparing different companies with different size in the same industry and it is simple to  prepare.
2. The ratio helps in identifying profitability, debt repaying capacity, liquidity of the firm which provides some information about the company to shareholders, lenders and creditors.
3. Trend and graphs can be easily created through ratio analysis.

Disadvantages:

1. These are based on historical data and has less relation to what the companies will perform in future.
2. These ratios can be misleading regarding future of company . Fo example APPLE P/E ratio was nearly 300 in 2000s. which was above industry average yet it made millions for its investors, It is aid to fundamental analysis but cannot be used as a substitute.
3. These are affected by various assumptions like depreciation policy, inventory policy,etc and can give misleading results.


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jeff jeffy answered 1 year ago
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