Inadequacies of Accounting Ratios as Tools of Financial Analysis Essay

Inadequacies of Accounting Ratios as Tools of Financial Analysis - Essay Example On the contrary, the financial ratios are also possible due to the flow that goes on to divide the same by a level that comprises of the return on equity or the earnings itself with respect to the equity. [Osteryoung, 1992] In calculating financial ratios, one must fathom that the numerator or the denominator at any point in time might just be the ratio, remarked as the PEG ratio. This paper discusses the financial ratios and the five categories associated with it as well as the questions that are answered to decide how the weight is evaluated owing to the financial health of an entity. This is quite true that in terms of financial ratios, the ratio analysis has got its due part in telling one and all about the whole category and as such the industry. On the other hand, there are a number of important pointers that one can pick with regards to the theory of ratios for that matter. Let us start with the financial ratios. These are the flags that in essence lay the foundation for showi ng those areas that can be remarked as the ones having strengths or weaknesses. [Mills, 1998] For this point in case, even more than one ratios can eventually be misleading, but when the same are combined with different knowledge that are available in the wake of an industry, ratio analysis can go a long way in discussing and indeed detailing about this industry. Secondly, one is unable to discern or find a single correct value for a ratio that needs to be chalked up for this whole scenario and more often than not; these are not absolute terms.