Inadequacies of Accounting Ratios as Tools of Financial Analysis
Ratio analysis provides an indication of a company's liquidity, gearing and solvency. But ratios do not provide answers; they are merely a guide for management and others to the areas of a company's weaknesses and strengths (Palat 1999).
However, ratio analysis is difficult and there are many limitations. This section will identify and discuss the inadequacies of accounting ratios as tools of financial analysis.
It is difficult to use ratios to compare companies, because they very often follow different accounting policies. …
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