As the factors of the variables of ratio analysis are different for different industries and it also varies from country to country so for taking a decision based on the ratio analysis the researcher should take all the factors which affect the variable in consideration…
The paper is an attempt to analyze the accuracy of the statement of Lev and Sunder using some evidences taken from real world, especially by doing the cross sectional analysis of financial ratios. Use of Financial Ratios Financial ratios are used to measure a company’s financial condition or to analyze between two companies’ financial condition. All the stakeholders of the company have interest in company’s future, that is how the company would perform in the short term or long term future, how much it is secure to invest in the company, what type of change should be introduce so that the company can perform better.
When an investor wants to take the decision to invest money, certainly he wants to invest it in the most effective company, the decision he can take by using the financial ratio analysis along with other type of analysis like qualitative analysis or other type of quantitative analysis.
Critical Analysis Ratio analysis is a very widely used tool for analyze the financial stability of a firm. But there are certain problems arise when the analyst don’t take the associated factors in consideration. When the analyst is doing the performance analysis of two companies, they should remind that two companies can follow two different accounting policies. There is no single accounting standard which is being followed by the companies all over the world.
(Fischer, Taylor and Cheng, 2008, p.505). The taxation rules of different states, different countries vary over the world. The inflation over the world is different. A multinational company has to face different taxation policy, different inflation over the world. So when a researcher is analyzing the performance of a company using ratio analysis, he should take these factors in account. There are also technical factors associated with the analysis. Many statistical tools which are being used in ratio analysis are based on the assumption that the data are normally distributed, but in reality that doesn’t happened. For identifying the financial indicators specifically for Critically Access Hospitals the Flex Monitoring Team used 114 financial ratios as their part of research. But they found many problems when research about the industry, like Hospitals with negative current Assets or negative current liabilities was excluded from the calculation of median, but that should be included when researching about the liquidity of the industry (Flex Monitoring Team, 2005, p.17-18). A research study was performed by taking 66 listed Malaysian firms’ data for the period 1980 to 1996. The forms were taken from 3 sectors industrial sector, mixed industry and combination of industrial and property sector. From the research it has been seen that only current asset percent was conformed to normal distribution. For doing the ratio analysis effectively three type of transformation techniques were used namely square, square root and natural log. When the square and square root property were used they were found as not effective, because the variables of the ratio analysis are not normally distributed. But natural log technique is proved effective by the researcher as the process considers that the data available is not normal. The researcher proved through the research that when a ratio analysis is being performed to analyze the performance of a company or comparable analysis between two companies is done then they should address the proportionality effect on the ratio’s normality (Sori et al., 2006, p.71-81). From a survey done on U.S.A. firms it is clear a ratio can ...
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The financial ratio helps to find out the performance of the firm over the years and its state of affairs. It used to analyze the functional effectiveness of the firm comparing with the competing firms. Financial ratios help to compute various financial statements and formulate new business-investment policies or to arrive at any management decision.
In the year 1979 in their research paper Lev and Sunder raised the issue that the ratio analysis done by the researcher is often motivated by the tradition and convenience, they generally not consider the theoretical background of the variables of the concerned ratio.
According to Lev and Sunder (1979) the extensive use of financial ratios by both practitioners and researchers is often motivated by tradition and convenience rather than resulting from theoretical considerations or from a careful statistical analysis. However, this statement of Lev and Sunder have gained criticism as well as praised by different scholars and analysts as in their research Lev and Sunder were able to identify different issues of using financial ratios.
You can use them to examine the current performance of your company in comparison to past periods of time, from the prior quarter to years ago. Frequently this can help you identify problems that need fixing. Even better, it can direct your attention to
strates a company’s ability to pay off its short term obligation/ current liabilities (amount due within 12 months time) with the current assets that it holds (Bpp Learning Media, 2009).
Gearing is an essential element which helps in deciding upon the balance between equity