To determine how well an organization is performing, it is useful to conduct a financial ratio analysis, and then compare these ratios with the appropriate industry benchmark. An organization's liquidity, profitability, asset turnover, and debt management ratios are important ratios to analyze. These ratios show the rate of return on shareholder investments, also called return on equity (ROE). If an organization's ROE is below the appropriate industry benchmark, it should try to increase its sales, decrease its expenses, or both. An organization's ROE is magnified when its debt level is relatively high. However, unfortunately, financial ratio analysis is not without problems.
What are some of the problems related to financial ratio analysis? How can these problems be rectified?
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