Methodological issues with financial ratios Essay

Methodological issues with financial ratios - Essay usageThe paper is an attempt to analyze the accuracy of the statement taking the evidence from the last 10 long time from the research work published. Use of Financial Ratios Financial ratios are used by the company stakeholders as they have different kind of interest in the concerned company. The shareholders assess the ratios and take the decision whether the process of the company would be profitable for them, thereby take the investment decisions. The company management analyzes the flaws of the performance of then(prenominal) years and tries to improve it in the future years using ratio summary tool. The creditors of the company feat to find that the company is credi tworthy anymore or not (Moyer, McGuigan and Kretlow, 2008, p.58). By doing the comparable analysis of ratios an investor or a prospective investor take the decision that which firm is better to invest, from where they can get the best impart when the company management has the interest that how their company is perform with respect to the industry standard (Hitchner, 2011, p.103). When doing the ratio analysis for the above mentioned various purposes then the user should make sure that he has considered the various factors which affect the variables of the ratio. ... The two companies whitethorn be in same industry, but their size and their focus areas can be different, so it would not provide the accurate result by doing the ratio analysis without taking the factors associated with it (Brigham and Ehrhardt, 2010, p.109). Two companies may not follow the same be standards, or a company can change the accounting standards they are following in recent years. The taxation rules of different states or countries are different as well as the political condition also. A multinational company has to face different inflation, different taxation rules throughout the world. So whether doing the trend analysis or cross sectional analysis an ana lyst should consider these factors. There are also technical factors associated with this issue. The analysts use many statistical tools which take the laying claim that the data is normally distributed but in reality it doesnt happen, and the outcome of the analysis not generate fruitful. A research study was performed by taking the data of 66 listed Malaysian firms and the data was of the percentage point 1980 to 1996. The sample firms were taken from 3 different industries. It is seen by the research workers while doing that research that only current asset percentage was conformed to normal distribution, which supports the fact that all data used in the statistical tool for performing ratio analysis is not normally distributed which is assumed by the analysts generally. For doing the ratio analysis effectively the researcher used three types of transformation techniques namely square, square understructure and indwelling log. The square and square root process proved as i neffective as they consider the data as normally distributed, which the natural log process dont. The researchers