Discussion and Responses

Discussion and Responses - Professor and Class Ratio...

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Professor and Class, Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick indication of a firm's financial performance in several key areas. The ratios are categorized as Short-term Solvency Ratios, Debt Management Ratios, Asset Management Ratios, Profitability Ratios, and Market Value Ratios. There are a number of limitation of ratio analysis that someone preforming a ratio analysis should be aware of. For instance historical versus current cost, inflation, aggregation, operational changes, accounting policies, business conditions, interpretation, company strategy, and point in time. All of the information used in ratio analysis is derived from actual historical results. The information on the income statement is stated in current costs or close to it, whereas some elements of the balance sheet may be stated at historical cost which could vary substantially from current costs. This disparity can result in unusual ratio results. If the rate of inflation has changed in any of the periods under review, this can mean that the numbers are not comparable across periods. The information in a financial statement line item that you are using for a ratio analysis may have been aggregated differently in the past, so that running the ratio analysis on a trend line does not compare the same information through the entire trend period. A company may change
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