Real Estate Investment Trust and Ratio Analysis
Question 2a: Discuss the importance of ratio analysis for inter-firm and intra-firm comparisons including circumstances responsible for its limitations .If any
Answer: Ratio analysis implies the systematic use of ratios to interpret the financial statements so that the strength and weaknesses of a firm as well as its historical performance and current financial position can be determined. With the help of ratio analysis conclusion can be drawn regarding several aspects such as financial health, profitability and operational efficiency of the undertaking. Ratio analysis is very useful in making inter-firm comparison as it helps to draw a comparisonbetween the entities within the same industry or otherwise following the same accounting procedure. It provides the relevant financial information for the comparative firms with a view to improving their productivity & profitability.
Ratio analysis helps in intrafirm comparison by providing necessary data. An interfirm comparison indicates relative position. It provides the relevant data for the comparison of the performance of different departments. If comparison shows a variance, the possible reasons of variations may be identified and if results are negative, the action may be initiated immediately to bring them in line. However, in spite of being such a useful tool, it is not free from its limitations. A single ratio is of a limited use and it is essential to have a comparative study. The base used for ratio analysis viz: financial statements have their own limitations. Also, they consider only the quantitative aspects of business transactions where as there are various other non-quantitative aspects such as quality of work force which considerably affect profitability and productivity. Also, ratio analysis as a tool is also limited by changes in accounting procedures/policies.
Question 2b: Why do you understand by the term 'pay-out ratio'? What factors are taken into consideration while determining pay-out
Answer: Ratio analysis implies the systematic use of ratios to interpret the financial statements so that the strength and weaknesses of a firm as well as its historical performance and current financial position can be determined. With the help of ratio analysis conclusion can be drawn regarding several aspects such as financial health, profitability and operational efficiency of the undertaking. Ratio analysis is very useful in making inter-firm comparison as it helps to draw a comparisonbetween the entities within the same industry or otherwise following the same accounting procedure. It provides the relevant financial information for the comparative firms with a view to improving their productivity & profitability.
Ratio analysis helps in intrafirm comparison by providing necessary data. An interfirm comparison indicates relative position. It provides the relevant data for the comparison of the performance of different departments. If comparison shows a variance, the possible reasons of variations may be identified and if results are negative, the action may be initiated immediately to bring them in line. However, in spite of being such a useful tool, it is not free from its limitations. A single ratio is of a limited use and it is essential to have a comparative study. The base used for ratio analysis viz: financial statements have their own limitations. Also, they consider only the quantitative aspects of business transactions where as there are various other non-quantitative aspects such as quality of work force which considerably affect profitability and productivity. Also, ratio analysis as a tool is also limited by changes in accounting procedures/policies.
Question 2b: Why do you understand by the term 'pay-out ratio'? What factors are taken into consideration while determining pay-out