However most of the people will look at both ratios

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suppliers will be looking at the quick ratio of the company. However, most of the people will look at both ratios together and compare them. Furthermore, an investor will be looking at the quick ratio as the first ratio to determine whether to invest in a business because it can quickly show the solvency of the company. This ratio is also useful for those potential partners who are looking forward to join the business. Generally, quick ratio is more suitable in measuring the liquidity of a company than the current ratio as it only measures the relationship between quick assets and current liabilities.
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vii) List any FIVE (5) limitations of the ratio analysis. Interpretation. It is hard to know whether a ratio is good. A high ratio does not means it is a good sign for a company. For example, a high cash ratio may not a good sign, as it could be the company just sold a large amount of its stock to bolster its cash or it could be a sign that the company is no longer a growth company. A company may have some good ration and some not, which makes it difficult to tell if it is a strong company or not. Inflation. The rate of inflation could be changed in any period, which means the result of the ratios become not comparable over the periods. Inflation will also affect the company’s balance sheet which data is based on historical data. Thus, all the inventory values, depreciation, profits will be inaccurate. Accounting policies. Different companies may have different methods for recording transactions, calculating depreciation, valuing inventory. Even within the same company may also have different accounting policies. Therefore, it may be like comparing an apple and orange, lead to an invalid comparison. Historical concept. All the information used for calculating ratios are derived from actual historical result. This means that the information may be inaccurate compared to actual value. This will lead to an inaccurate ratio analysis. Condition business. Having a low ratio does not means the company is not doing well, the condition of business have to be counted as well. As a low ratio may not a good sign for a bid company, but it does not means it is a bad ratio for a small company. For example, 60 days of debtor ratio might be a poor result for a company during a period of peak of the economy, but it might be excellent for a company which is in the condition of economic contraction.
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