What are the limitations of financial ratios?
1. What are the limitations of financial ratios?
Classify and properly label your answer into at least the following categories: liquidity ratios, activity ratios, leverage ratios, and profitability ratios.
2. R.E.C. Inc.’s staff of accountants finished preparing the financial statements for 2010 and will meet next week with the company’s CEO as well as the Director of Investor Relations and representatives from the marketing and art departments to design the current year’s annual report. Write a paragraph in which you present the main idea(s) you think the company should present to shareholders in the annual report. Why do you think those ideas should be included?
Limitations of Financial Ratios
When comparing information retrieved from financial statements, it might be challenging to deal with the ration analysis because of the following reasons;
Liquidity ratio: It might be difficult to estimate the relation between the liabilities of a bank and the liquid assets of an organization. The financial rates can only be effective if they can give a better comparison of the commercial representations of a company and in this case, it might be difficult to achieve the final goals (Lewellen, 2004).
Activity ratios: It might be a problem when it comes to gauging the business activities that a company conducts to convert their assets and liabilities into cash.