As your text describes, ratio analysis is a common technique in financial analys

Question

As your text describes, ratio analysis is a common technique in financial analysis. One of your colleagues states that a thorough ratio analysis is all that is needed in considering the financial health of a company. Although you agree that ratio analysis is a helpful guide, there may be some potential pitfalls in ratio analysis.

Discuss at least three potential issues in utilizing ratio analysis that you would share with your colleague. In addition, calculate a liquidity, profitability, and efficiency ratio from your Week Six company (Amazon.com) to demonstrate your observations.

Develop a 200 – 300 word explanation supporting your findings.

Explanation / Answer

The issues that arises in using the ratiA company may change its underlying operational structure to such an extent that a ratio calculated several years ago and compared to the same ratio today would yield a misleading conclusionos analysis are:-

1. Inflation - If the rate of inflation has changed in any of the periods under review, this can mean that the numbers are not comparable across period

2. Operational Changes-

The issues that arises in using the ratiA company may change its underlying operational structure to such an extent .

3. Accounting policies

Different companies may have different policies for recording the same accounting transaction

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