Limitations of financial ratios as a tool to evaluate financial performance Essay

Although monetary ratios get a critical fictional character in allowing investors and psychoanalysts to give appropriate predictions and a measure of how the company go away perform in the future(a) years in terms of roue prices and profitability but a measure problem with these ratios is that they are establish on historical data and therefore an attempt to look into the future with the use of these ratios is risky and exposes investors to different kinds of risks such as inflation, cross-border risk and otherwise business related risks. Another limitation of these ratios is related to there bound use on there own.Certain ratios are insignificant unless they compared with the sr. data or pains averages. This is a main reason wherefore most analysts want to compare a companys financial ratio with the industry figures. This likewise means that an understanding of the business and industry must be there with the investor before a decision is make with regards to purchasing the stock of a company. We as well as see that firms and their finance departments do try their best to inflate results and window dress the balance tabloid and profit and loss figures.This can lead to over estimated revenues and understated be which might be discovered later. Therefore it is important to look at different ratios and notes to the dictations before conclusions are drawn. There is also a reason for companies that require defaulted or there have been instances where scams have been caught and reported by the securities companies and other government departments. Some of the financial ratios also might be impacted by the sudden change in a bad-tempered factor or rough stinting factor that might have a short-term affect on the performance of the companys bottom line and earnings per share.To counter this short-term possibility analyst must look at both technical and fundamental epitome before deciding the long-run view on the company. Another subject area with financial ratios is that it does not take into account off-balance sheet items that might play a significant role in the profitability and revenue multiplication of a company this is a case especially for investment banks. We also see that financial ratios only use accounting data and not economic data.This is also a downside to financial ratios as only moderate data is being used to come to important conclusions. (Financial modeling guide, n. d. ) finding MITIE is a strong group with businesses in strategically strong markets where long-term view is extremely positive. The company has strong financials with a prudent form _or_ system of government of avoiding debt in uncertain judgment of convictions. The company has done well considering the unwieldy time that has been introduceed by the economic recession and worldwide financial crunch. The companys profitability looks stronger as we move into 2010 and beyond.The company also has huge potentiality in business areas such as infrastructure management and airplane propeller works especially within the public sector. We say so because a lot of options provide be available and a number of opportunities present themselves specifically in the government sector. (Reilly & Brown, 2003) The financial analysis reveals important obstruct about the company firstly the company has very few assets O.K. by long-term borrowing which shows that the company has an opportunity to raise monetary resource by leveraging its balance sheet.This could be very effective if some strategic capital is bought or expansion is sought by the company. We also see great potential as the liquidity and cash billet of the company s very impressive this is the case because it is very difficult to manipulate important data in the cash flow statement and the cash flow figures therefore a good performance in that sector shows great potential and the healthy performance of the company.Essentially what is of terminal importance for the company is the fact that it has successfully faced the lowest points of the economic cycle and more importantly it ensured that it developed adequate policies to handle the recessive times so that in future when liquidity crunch will strike again the company will have adequate measures in place.Appendix Bibliography Baker. H, Powell. G, 2005. Understanding financial management a practical guide. Blackwell create Financial Modeling Guide, n. d. Limitations of Financial Ratios in Financial Modeling.Viewed February 6, 2010. http//www. financialmodelingguide. com/financial-ratios/financial-ratio-limitations/ MITIE, 2010. Investors at MITIE, viewed February 7, 2010 http//www. mitie. com/investors MITIE, 2010. nigh us, viewed February 7, 2010 http//www. mitie. com/about-us MITIE, 2010. Annual Report 2009, viewed February 7, 2010 http//www. mitie. com/investors_reports-and-presentations_2009_MITIE-Group-PLC-Annual-Report-2009 Reilly, K Frank & Brown, 2003. Investment Analysis and P ortfolio Management, Cengage South-Western Publisher.