Ratios Essay Example | Topics and Well Written Essays - 250 words

Ratios - Essay ExampleThe standardized scope of financial ratios also limits valued aspects of the communicated information because the ratios do not communicate exact values of financial information. Profitability is for example expresses in ratios and a firm with relatively lower profit level may report higher gainfulness ratio than a firm that has recorded higher profit volume. Ratios also assume linear consanguinity between variables and this mislead stakeholders because most variables be not linearly related (Lee, 2006).Investors could use liquidity ratios to strain decisions, on whether to invest in a smart set or not, by comparing the ratios to the value one. Ratios that are less than one means that a company is overwhelmed by debt, is liable to creditors terms and should inform a potential investor against the company. Ratios, which are greater than one, however mean an organizations independence from creditors adverse influences and offers short stability for investme nt. Investors can also use the magnitude of liquidity ratios to understand the level of a companys liquidity for investment decision because a more liquid company is more skillful for investors short term interests (Lee,