Use of Financial Ratios Essay Example | Topics and Well Written Essays - 1000 words

Use of Financial Ratios - Essay ExampleThe paper is an attempt to analyze the accuracy of the statement of Lev and Sunder employ some evidences taken from real world, especially by doing the cross sectioned analytic thinking of financial ratios. Use of Financial Ratios Financial ratios argon used to measure a social clubs financial condition or to analyze between two companies financial condition. All the stakeholders of the club have interest in social clubs future, that is how the society would perform in the short status 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 lay outive company, the decision he can take by using the financial ratio epitome along with other type of analysis like qualitative analysis or other type of quantitative analysis. Critical Analysis Rati o analysis is a actually widely used tool for analyze the financial stability of a firm. precisely there are certain problems arise when the analyst dont 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 diametrical 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 distinguishable 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. galore(postnominal) statistical tools which are being used in ratio analysi s are based on the assumption that the data are normally distributed, but in reality that doesnt 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 accredited 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 part was conformed to normal distribution. For doing the ratio analysis effectively three type of transformation techniques were used na mely jog, square root and natural log. When the square and square root property were used they were found as non effective, because the variables of the ratio analysis are not normally distributed. But natural log technique is proven 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 ratios normality (Sori et al., 2006, p.71-81). From a survey done on U.S.A. firms it is clear a ratio can