Ratios

Ratios can portray a somewhat accurate picture of the financial stability of a company. However, ratios can be manipulated to make the company look more financially successful, meaning that they might not be very accurate. Ratios can also be used to compare companies within the same industry, however, this will only be accurate if the companies use the same accounting practices and policies, otherwise the ratios will differ and won't be comparable. Also, when considering ratios, they provide information of financial health, but they do not provide the reason for the current financial state. Researching financial documents more carefully will provide an explanation of ratios and how they compare to other companies as well as industry norms.

Liquidity ratios can be used to determine whether or not a company has enough cash and assets to fulfill current liabilities. This can be useful to investors since they can see the potential sucess of a company based on the ratio of cash and assets on hand compared to current debt. A high ratio indicates financial stability since there is likely more than enough cash to pay current obligations. Companies with a low ratio might be risky to invest in, as they may not have enough cash to answer any defecits. Before an investor decides whether to invest in a company based on liquidity ratios, they should also consider the size and type of business in question. Different types of companies have different needs and therefore require different amounts of assets and working capitol to be functional. (Walther, 2012) Overall, I feel that investors should use liquidity ratios as a guage of financial stability, but should not make investment decisions based on this ratio alone.

Walther. (2012). Principles of Accounting: Volume I. San Diego, CA: Bridgepoint Education, Inc.