Setbacks Of Ratio Analysis Essay

Length: 2 pages Sources: 2 Subject: Accounting Type: Essay Paper: #40969446 Related Topics: Financial Ratio Analysis, Gaap, Financial Statement Analysis, Financial Reporting
Excerpt from Essay :

Ratio Analysis: Setbacks

Ratio Analysis: Potential Pitfalls

In basic terms, ratio analysis comes in handy in the evaluation of a firm's current financial position and the direction this position is expected to take in the future" (Besley and Brigham, 2008, p. 250). That ratio analysis is a critical tool when it comes to the analysis of an entity's performance is not an overstatement. As a matter of fact, most investors rely on ratio analysis in the analysis of the financial statements of various companies so as to determine the most appropriate entity in which to invest.

Here are some ratios for my week six company, i.e. Caterpillar -- for the year ended Dec 31st 2013.

Liquidity ratio

Current ratio = current assets/current liabilities = 38,335,000/27,297,000 = 1.40

Profitability ratio

Return on equity = Net Income/shareholder equity = 3,789,000/20,811,000 = 0.18

Efficiency ratio

Receivables turnover = Annual credit sales/accounts...


In that regard, therefore, it is not all that is needed to make an informed decision regarding the financial health of a given entity. To begin with, ratios are only relevant when utilized in a comparative context (Lee, 2007). This is to say that when one has access to only a single year's worth or an entity's financial statements, financial ratios may not be useful. The ratios computed above do not tell us much about the financial viability and health of Caterpillar Company. Ratios of a given entity may also not be useful unless they are compared to the financial ratios of another entity. It would be futile to, for instance, compute the ratios above and make use of them to come up with a decision on whether or not to invest in Caterpillar without comparing them with those of another company in the same industry as Caterpillar, i.e. A competitor. In simple terms, therefore, without a reference point, financial ratios may not be as useful. Next, it is also important to note that as Lee (2007, p. 250) points out, due to the fact that they are founded on the accounting numbers that are reported on the financial statements of entities, "they contain all the accounting limitations of these numbers including the flexibility and subjectivity of GAAP, the possible presence of creative accounting practices, and the inherent limitations of historical cost account." This…

Sources Used in Documents:


Besley, S. & Brigham, E. (2008). Principles of Finance (4th ed.). Mason, OH: Cengage Learning.

Lee, T.A. (2007). Financial Reporting and Corporate Governance. Chichester, West Sussex: John Wiley and Sons.

Cite this Document:

"Setbacks Of Ratio Analysis" (2014, November 20) Retrieved August 8, 2022, from

"Setbacks Of Ratio Analysis" 20 November 2014. Web.8 August. 2022. <>

"Setbacks Of Ratio Analysis", 20 November 2014, Accessed.8 August. 2022,

Related Documents
Financial Analysis of Lehman Brother
Words: 2992 Length: 10 Pages Topic: Business Paper #: 52231514

Financial Analysis of Lehman Brother Lehman Brothers The history has been full of financial collapses and financial scandals and one of the biggest financial collapses that a company has ever seen was that of Lehman brother. The collapse of a firm as huge as Lehman Brother and a firm which has such great experience of over a hundred years lead the world into a shock. It created doubts in the minds of

Financial Analysis of Estee Lauder
Words: 1381 Length: 5 Pages Topic: Economics Paper #: 26771693

Both these elements have undergone decreases of around - 45% in 2002, due, perhaps, to an increase in financial and operational costs. Solvency Ratios Mainly, solvency ratios are aimed to point out towards two important issues. First of all, the company's capacity to pay its debts during a certain period of time. Second of all, the rate at which the company is using the financial leverage or the proportion of debt

Economics Country Analysis
Words: 3685 Length: 10 Pages Topic: Literature - African Paper #: 10554050

Economics - Country Analysis Country Overview and Current Events (News) Ethiopia, traditionally known as Abyssinia, is a landlocked Sub-Saharan country located at the Horn of Africa in East Africa, bordering Somalia, Kenya, Eritrea, Djibouti, Sudan, and the newly-created South Sudan. It covers approximately 1,126,829km2 of land; about the size of the state of Texas, and was, until the split of Sudan, the second-largest country in Africa. Being landlocked, Ethiopia largely relies on

Strategic Analysis of Some Geographical
Words: 2120 Length: 7 Pages Topic: Military Paper #: 6390015

Instead he had run into a trap, and had faced a triple defeat -- in Kharkov, in the Crimea, and in Leningrad -- that allowed the Germans to attack again, this time across the great plains of southern Russia" (115). Following the defeat of the Germans at the hands of the Russians, though, the Soviet army planned its counterattack but the same enormous land mass that adversely affected Hitler's ability

Analyzing Industry and Firm Analysis
Words: 3126 Length: 6 Pages Topic: Sports - College Paper #: 33056499

Industry and Firm Analysis Bennett, J. (2016). Fiat Chrysler to Build Parts Distribution Center in Virginia. Wall Street Journal. Retrieved 25 May 2016 from: Fiat Chrysler Automobiles NV is investing $12.2 million to build a new distribution center in Virginia amid growing demand for parts used by its dealerships to both repair and customize its vehicles. The 400,000-square-foot Mopar distribution center, located in Winchester, will employ about 70 people and ship more

Waste Management: Strategic Analysis
Words: 9268 Length: 33 Pages Topic: Transportation - Environmental Issues Paper #: 56262122

Waste Management: A Strategic Case Analysis Company History External Analysis General Environmental Analysis Demographic Segment Economic Segment Political/Legal Segment Socio-Cultural Segment Technological Segment 103.1.6 Global Segment 103.1.7 Summary of General Environmental Analysis 113.1.8 Driving Forces 123.2 Industry Analysis 123.2.1 Description of the Industry 123.2.2 Industry Dominant Economic Features 133.2.3 Market Size 133.2.4 Market Growth Rate 143.2.5 Industry Trends 153.2.6 Five Forces Analysis 173.2.7 Industry Key Success Factors 184.0 Internal Analysis 184.1 Organizational Analysis 194.1.1 Corporate Mission 194.1.2 Products and Services 194.1.3 Leadership 204.1.4 Organizational Culture Structure 204.1.6 Strategy 214.1.7 Summary of Organizational Analysis 214.2 Analysis of Firm Resources 214.2.1 Tangible