Ratio Analysis in Measuring Company Performance

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Advantages and Disadvantages of Ratio Analysis as a Measure of Company Perform
Introduction
Financial ratios are variables that are obtained from two items in the financial statements with the aim of developing a deeper meaning of the financial elements. These ratios have been used for many purposes leading to many benefits. However, limitations that come along with the ratios which are making the ratios less reliable.
Advantages of using Financial Ratios
Financial ratios have the capacity of simplifying the huge data presented in the balance sheet, cash flow and the income statement (Subbarayan, Raj, Antony & Jothikumar, p.233). This is because; the ratios depend on just two elements to be compared. This has been found to save a lot of time and resources when trying to understand the business position.
Additionally, the use of these ratios allows a perfect comparison between two businesses of different sizes as far as they operate in the same industry (Wong & Joshi, p. 27). In establishing the extent of borrowing of a company, the two companies (despite their sizes) can use their liabilities and assets and by this one may be able to choose the most reliable one
More so, these ratios are the foundations of decision making. They help in the identification of the weakest points of the business and create insight on where improvements need to be made (Wong & Joshi, p.27).
Disadvantages of Financial Ratios
These ratios have been criticized because they are developed out of the past performance of the business.

They are therefore not suitable for defining the current and future state of the business (Subbarayan, Raj, Antony & Jothikumar, p.239).
More so, there is no standard of comparison on the actual value of the ratios. This makes it difficult to define the performance of the business successfully. Lastly, financial ratios are quantitatively based. They depend on the values from the statements of accounts only (Wong & Joshi, p.27). They, therefore, fail in providing the qualitative value of the business.
Conclusion
Financial ratios are the suitable and easiest means of determining the performance of the business. It is however important that the extrapolation of the business’ performance in the future is undertaken in a manner that allows for an accurate prediction. More so, there is a need for universal standards of comparison to be developed.
Work Cited
Subbarayan, A., et al. “ANALYSIS OF SELECTED FINANCIAL RATIOS OF PRIVATE AND PUBLIC SECTOR BANKS IN INDIA: A PRINCIPAL COMPONENT APPROACH.” INTERNATIONAL JOURNAL OF AGRICULTURAL AND STATISTICAL SCIENCES 13.1 (2017): 233-241.sWong, Karen, and Mahesh Joshi. “The impact of lease capitalisation on financial statements and key ratios: Evidence from Australia.” Australasian Accounting Business & Finance Journal 9.3 (2015): 27.