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.
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