financial ratio analysis, a tool that shows how figures between the balance sheet and the income sheet are related. Ratios are used to appraise a company's past financial performance and its potential for the future. A company's financial statements are of interest to creditors, investors, financial analysts and internal accountants. Using ratios helps them to analyze the overall financial health of a business. By computing financial ratios, one is better able to evaluate a company's financial status and operating performance for a given time period.
Here are some of the advantages of ratio analysis:
It simplifies the comprehension of financial statements.
It facilitates comparisons between firms.
It highlights the factors associated with strong firms and weak firms.
It provides a helpful tool in investment decisions.
Here are some limitations of ratios analysis:
It is susceptible to personal bias by the people interpreting them.
It analyzes historical data, making its predictive...
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