Arrow of Performance
Value Investing Approach and Strategy.
  • Home
  • WatchList
  • Philosophy
  • Glossary
  • Books
  • Contact us

Archives

Translate

Financial Ratios

What Financial Ratios Don’t Tell Investors?

by Sir Biraj Dhakal March 24, 2019 No Comments

Shareholders analyze the financial statements to have information about the earnings of the firm. Financial ratios tell a lot of thing about a company. Like:

  • It’s Profitability
  • Operational Efficiency
  • Solvency Probability
  • Overall Financial Strength or Weaknesses
  • Assess Management
  • Debt Management and so on

Financial ratios are being closely watched by not only shareholders but also the short and long-term creditors, institutional lenders, bondholders, government, managers, financial institutions, competitors and so on.

Different groups of stakeholders are concerned about different pieces of information on financial ratios.

Management is more concerned about the overall financial strength and weaknesses of the firm.

Shareholders are more concerned about the earnings of the firm. They are interested to know how earnings per share, dividend per share, rate of return on equity has been growing over the years.

Creditors and lenders are more concerned about the debt payment capacity of a firm.

Bondholders are more concerned about the fixed charge payment capacity of a firm.

Limitations of Financial Ratios

Financial ratios do not indicate the future. As they are calculated on the basis of historical accounting information, they simply suggest what happened in the past rather than what is going to happen in the future.

All financial ratios require a base for comparison to derive meaningful conclusion about firm’s financial performance. For example, a firm may have return on assets of 10 percent. It has to be compared with the ratio of similar firm or the ratio of industry averages to conclude on the profitability performance of the firm.

Therefore, it suffers from difference in interpretation. Different person may interpret the same ratios in different way.

Also, the financial ratios indicate quantitative factors of the company but not the qualitative factors, which are of major importance.

Suggested Reading

  • Du-Pont Analysis Is A Most Important Ratio To Analyze Firm’s Performance.
  • Is Profit Maximization An Appropriate Goal For Financial Managers?
  • Habits Of Successful Investors
  • Financial Risk Is the Additional Risk To The Shareholders
  • How Does Wealth Maximization Goal Overcome The Drawbacks Of Profit Maximization Goal?
  • Stock Investing Is More Of An Art Than Science

Share this:

  • Print
  • Tweet
  • WhatsApp
  • Email

Financial Ratios

  • Previous Is There A Way To Reduce Portfolio Risk to Zero?4 years ago
  • Next If I Get Too Excited About Stocks, I Look At This Picture! And You Should Too.4 years ago

Leave a Reply Cancel reply

Top Posts

  • Is Profit Maximization An Appropriate Goal For Financial Managers?

Categories

  • Behavioral Investing
  • Book Review
  • Business Analysis
  • Current Market
  • Financial Analysis
  • Financial Ratios
  • Investing Lessons
  • Investment Idea
  • Investment Philosophy
  • Management
  • Personal Finance
  • Podcast
  • Portfolio
  • Quarterly Result
  • Stock Valuation
  • Trading
  • Uncategorized

Subscribe to Blog via Email

Menu

  • Home
  • Glossary
  • Books
  • Contact
  • Privacy Policy
  • Terms of use
  • About us

Top Posts

  • Is Profit Maximization An Appropriate Goal For Financial Managers?
  • Facebook
  • Twitter
2023 Arrow of Performance. Donna Theme powered by