International Journal of

Business & Management Studies

ISSN 2694-1430 (Print), ISSN 2694-1449 (Online)
DOI: 10.56734/ijbms
Financial Ratios: Considerations of Their Relevance to Corporate Financial Analysis and an In-Depth Look at the Major Errors Often Mar These Ratios


This article focuses on financial ratios, a topic that is often considered obsolete. This leads many scholars and companies to underestimate the danger of incorrect calculations and interpretations of these ratios. Sometimes, in some articles and books, it can be perceived how the author, while addressing the issue of a company's financial situation, considers Financial ratios as obsolete analysis tools and proposes the use of much more sophisticated and complex instruments for financial analysis. This behaviour is to be stigmatised because we know that more refined and complex instruments must supplement financial ratios for a company's financial analysis to be complete. However, we disagree with considering Financial ratios as obsolete instruments. Further investigations may be performed alongside these ratios, but these ratios can never replace by any complex and, perhaps, more structured financial tool. And it should note that underestimating the importance of financial ratios frequently leads to the quantitative determination of incorrect values and the interpretation of data, even if determined correctly, that is entirely misleading and far removed from the reality that the ratios are intended to portray. For the writer, therefore, financial ratios are not only not obsolete but represent the starting point of a financial analysis that provides company management with indispensable information on the development of the financial situation of the company to which they belongAnalysis of a company's financial situation is not feasible except by comparing specific data with other values. Absolute values do not allow one to judge the 'trend of the company's financial situation. For this reason, it is well-known that particular ratios are used to understand whether the enterprise enjoys excellent health or has more or less severe problems financially. Often the determination of these ratios starts foot, by some scholars and by many companies, using aggregates, unsuitable for the analysis to be complete and correct. In some instances, it is also noticeable how ratios are determined whose informational value is practically null. As a result, a calculation of them is an interpretation that can be downright misleading regarding the situation being experienced, at a given instant, the enterprise under analysis. And it should be noted how using ratios alone is insufficient to carry out a financial analysis point. The completion of proportions with dynamic analysis is essential, and therefore, for this reason, the preparation of a cash flow statement should be considered indispensable completion of purely financial ratios.