Financial Ratios (Essay Sample)

Financial Ratios Name Institution Course Tutor Date Limitations of Financial Ratios Financial analysis and ratios enable management to identify areas of deterioration and improvement in the organization. Financial managers draw information from financial statements that must be as accurate as possible lest the ratios provide errors and false information. So, as much as financial ratios help to improve an organization, problems could result from them. This paper discusses three main limitations: the inability to reflect the market, prone to errors of financial statements and can only compare similar organizations. First, financial ratios cannot reflect historical or current market issues. The analysis only helps to give information about the firm but will not identify events in the market, such as recession (McLaney, Atrill and Harvey, 2014). As such, financial managers may not make connections to market issues and aid in better decisions. Since they may not compare the cause of poor results to happenings in the market, it could lead to wrong conclusions. Secondly, financial managers should watch out for the limitation of financial ratios caused by errors in financial statements. Wrong figures and other errors in financial statements will translate to bad financial ratios. The ripple effect is wrong decisions made attempting to rectify or improve a move that could adversely affect the bus...