PRE - REQUISITES OF RATIO ANALYSIS
In order to use the ratio analysis as device to make
purposeful conclusions, there are certain pre-requisites which must be taken
care of. It may be noted that these prerequisites are not conditions for
calculations for meaningful conclusions. The accounting figures are inactive in
them & can be used for any ratio but meaningful & correct
interpretation & conclusion can be arrived at only if the points are well
considered.
1.
The dates of
different financial statements from where data is taken must be same.
2.
If possible,
only audited financial statements should be considered, otherwise there must be
sufficient evidence that the data is correct.
3.
Accounting
policies followed by different firms must be same in case of cross section
analysis otherwise the results of the analysis would be distorted.
4.
One ratio may
not throw light on any performance of the firm. Therefore, a group of ratios
must be preferred. Thus will be conductive to counter checks.
5.
Last but not
least, the analyst must find out that the two figures being used to calculate a
ratio must be related to each other, otherwise there is no purpose of
calculating ratio.
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