IMPACT OF RATIO ANALYSIS AS A TOOLS FOR INVESTMENT DECISION

IMPACT OF RATIO ANALYSIS AS A TOOLS FOR INVESTMENT DECISION

EXCERPT FROM THE STUDY

1. Ration analysis facilitates proper understanding of information continued in financial statements and aids Investment decision. According to Essien (2006:11), “financial statements carry lots of financial statements become more useful when they are related each other or to some other relevant financial data by means of rations.”  

2. Financial rations are useful in evaluating and predicting the performance and financial position of a business, as well as identifying areas that need improvement. Norbert f. Lindsborg of Harold  Washington college (in Dansby et al, 2000: 181) observed: “ As an investor in a corporation or as owner or manger of a business, you are naturally interested in knowing how well the firm is doing financially. You will want to compare this year’s is available to pay bills in the near future.

3. despite the obstacles to the proper use of financial ratios, there are helpful suggestions on ways to enhance efficient use of ratio analysis in decision-making. According to Lasher (1997:69,82); “although ratio analysis is a powerful tool, it has some significant shortcomings. Analysis have to be careful not to apply the techniques blindly to any set of statements they come across, due to differences in business and  accounting methods.

Hermason et al. (1992:846), “financial analysis relies heavily on informed judgment. Percentages and rations are guides to aid comparison and useful in uncovering potential strengths and weaknesses.  However, the financial analysis should seek the basic causes behind and established trends”.

4. Financial rations need to be carefully computers and used with the right yardsticks of comparison in order to of optimal benefit to the users. In this regard, Omuya (1983:456), “Interpretation of a change in a ratio needs careful examination of changes in both numerator and denominator. Without very full and detailed investigation some wrong  conclusion can as drawn.”

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