Theoretical Review of the Role of Financial Ratios

Abstract

Purpose – Financial ratios are an instrumental tool in the world of finance and hence comprehensive knowledge of its various aspects is mandated for its user. This study aims at providing the aforesaid comprehensive knowledge by highlighting the areas in which ratios can be used, limitation of ratios and methods to deal with the limitation.

Design/methodology/approach – The study is qualitative in nature and thus utilizes the past studies and researches to exhibit the various facets of financial ratios. The study incorporates all the researches that have used ratios as a tool for their study or ratios as the subject matter of study.

Findings – The study was able to identify and categorise past studies into areas of Financial evaluation, Insolvency Prediction, Valuation, Inter-linkage studies, Benchmarking & Decision making, Technical Analysis. Limitations of ratios identified from the literature are Proliferation of ratios, Lack of Normality and Accounting framework impact.

Originality/value – The study has assimilated unique exhaustive literature on financial ratios and presented the same in a categorized manner.

Keywords: Financial Ratios, Uses, Limitation, Precautions

JEL Classification: G00, G30