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Accounting and finance Evaluating ratio analysis.

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2 Accounting and finance Evaluating ratio analysis

3 Uses of ratio analysis ratio analysis is a powerful tool in the interpretation of financial accounts and provides a scientific basis for basing decisions on however, like other quantitative techniques there is a tendency to attach too much importance to ratios

4 Problems with ratio analysis the reliability of information; some information may be unreliable, inaccurate or out of date different accounting methods provide different results there is a tendency for businesses to "window dress" their financial information

5 Problems with ratio analysis figures are produced on an historical basis; analysis is based on past figures and do not necessarily show why things have happened past performance is not necessarily an accurate indication of the future

6 Problems with ratio analysis ratios rely on comparisons which can be problematic; like needs be compared with like competitors information may be difficult to obtain

7 Problems with ratio analysis each businesses corporate objectives will be different; not all businesses have the same profit objectives as ratio analysis looks at financial data, it ignores other factors that may be important in assessing performance (e.g. reputation, human relations, social and environmental policies etc.)

8 Problems with ratio analysis every business is affected by external factors many of these factors are not identifiable through ratio analysis performance may be reliant as much on economic trends (e.g. recession or boom) as a businesses efficiency market trends, legislation, brand loyalty etc. can also impact on a business

9 Summary it is a very useful technique for providing an indication of a business performance some qualitative factors are also going to be important

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