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 receivable = 55,656,000/18,729,000 = 2.97
It should be noted that although useful, ratio analysis has its own setbacks. In that regard, therefore, it is not all that is needed to make an informed decision regarding the financial health of a given entity....
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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
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