Question

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Although the financial ratios of Shaycole may look great at first glance this is not necessarily the case. Several different ratios are significantly different from industry norms which makes me skeptical of their accuracy. Also, even though the ratios may give the impression that the company is safe for investors does not mean that it is running efficiently. The high current ratio of 4.7 can mean poor management of working capital. The high inventory turnover can mean insufficient inventory and missing out of potential sales. The high accounts receivable turnover is good regarding the collections from its credit customers, but it can indicate a very restrictive credit policy where they can be losing customers to other companies that will allow them to purchase on account. Lastly, the low debt-to-equity ratio may indicate that the company is not taking advantage of its increased profits. There is no perfect number for a specific ratio. There are pros and cons to having high and low figure

Answer 1

It is true that Ratio Analysis is an important tool that can be used by Investors or Critics to analyse a Entity's Position relating to Liquidity, Profitability, Leverage, Turnover etc. On comparison with standards, it can provide us with idea as to the functioning of the Overall Entity.

However there is a catch to it. Financial Ratio may show an distorted image sometimes as there are no Fixed Established standard which may prove the ratio is good or bad. There are only recommendatory standards which also vary drastically from Industry to Industry and location to location.

Hence it becomes difficult to analyse the Financial Position of entity when its ratios are not close to the standard. Digging into such results may give varying results when looked at from different perspective.

For Examples: High Current Ratio(above 2 times) may imply better liquidity. But at the same time low Quick ratio may imply poor liquidity. These give contrasting results when compared.

Also Ratios do not provide actual position of the operations as to Management Decisions, Shareholding Pattern, Investigations or Inquiry going on, Tax Notices etc.