Ratio analysis is a tool used by accountants in analyzing their financial information in a given financial year. When calculating ratio analysis, the accountant does use the previous year’s information which is later used to compare the company’s operations with other similar companies. Ratio analysis acts as an effective tool because it helps the company to evaluate its financial performance. On the other hand, the accountant is in a position to determine the company’s liquidity position so as to know if it is able to meet its obligations. It is certain that the firm uses ratio analysis to determine its investment roots and also knowing its operating efficiency. Ratio analysis helps the company to plan for its future because the accountants are able to know what they have spent during the financial year and what they might require in future (Brigham &Houston, 2009).
Although ratio analysis is an important tool in a firm, there are many limitations towards its calculations. Below are some of limitations of financial analysis which the accountant should keep in mind during its financial interpretations. Limited comparability is one of the limitations which affect the use of ratio analysis. Since different accountants use different accounting policies, it is difficult at times to compare different financial information of companies which use different accounting policies. False results are another issue which affects the ratio analysis. When a firm experiences some losses, accountants may give false information if the data is wrong the conclusion which will be drawn from there will also be wrong. Accountants need to be accurate so that the ratio analysis which they want to place to be correct also (Schlichting, 2009).
Another major limitation when it comes to ratio analysis is that some important qualitative factors are not put into consideration when it comes to put them into application. Bearing in mind that ratio analysis is a technique of qualitative; it reaches a point where accountants ignore some factors which might be of help when providing information on financial status. Lack of standard terminology which should be used in comparing financial status is another limitation which affects ratio analysis (Brigham &Houston, 2009).
Odd lot theory is one of the technical analyses which are used by financials in determining some financial aspects of the firm. It’s a technical decision which assumes that the investor should make a sound decision against with the odd-lotters so as to be smart than the other party. According to the odd lot theory small investors who are actually believed to trade in those odd lots are believed to make come up with decisions which are not appropriate during times which are not appropriate. So as to be smart, the odd lot theory suggests that one need to do exactly opposite of what the odd-lotters are doing (Schlichting, 2009).
It is certain that fundamental analysis and technical analysis are two great thoughts which are used in the financial markets. When accountants want to look how the prices are moving in the market, they actually use the technical analysis. They also use technical analysis to predict the future of any given security price. On the other hand, fundamental analysis concentrates on the economic factors of any given firm. When it comes to fundamental analysis, it assumes that the market will provide certain information which is accurate for the investors to predict their investment options (Schlichting, 2009).
Brigham, E.F., &Houston, J.F. (2009).Fundamentals of Financial Management .Cengage Learning, 2009
Schlichting, T. (2009).Fundamental Analysis, Behavioral Finance and Technical Analysis on the Stock Market: Theoretical Concepts and Their Practical Synthesis Capabilities. GRIN Verlag