Question

The purpose of financial ratio analysis is so companies are able to compare their standing to previous years, other companies and what to expect the following year. When speaking in terms of what can be labeled "good" or "bad" depends on the internal and external factors. Take into consideration this year alone. With the pandemic there are many different performance evaluations that are no longer as important as they were this time last year. For example, last year companies were not forced to stockpile cash, but due to the crisis they need to because "it provides flexibility in an uncertain environment, protecting against further crises". With that being said, cash on hand is able to determine the worth of a company. The worth of the company this time last year played into how well they are doing for themselves, but did not necessarily create a security blanket that they now need.

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Q1. why financial ratios have less significant than cash stockpile compare to 2019 and 2020

Answer 1

While comparing year 2019 and 2020 it is arguable that financial ratios have less siginficance than cash stockpile. Cash stockpile as we know it if we had that all our worries could be eased whereas while taking a company into comsideration Cash stoskpile is not an ideal way to think in the first place under normal circumstances. But, taking unfrseeable conditiond companies are required to include provisions or allowances to face the unforseen conditions like provision for bad and doubtful debts. Whereas, Financial ratios are calculated by taking values from the financial statements of the company. These are used in analysis of the performance of the company.

The financial statements of 2019 will be very different from 2020. The pandemic has done much damages to many companies while nurturing some other. Anyways, The financial ratios that are calculated using the figures in 2019 financial statements cant forsee the performance of the company in 2020 as there was a pandemic and since its internationally affected its depth of affecting tthe companies performance would be very difficult to calculate and the figures of 2019 is not doing any good as they are calculated using the transactions taken place under normal circumstances. Hence there is an increased risk of cashout happens. Companies who maintained enough cash to handle the situation as pandamic provision etc. could survive the unexpected contigency.

Therefore it can be concluded that financial ratios were less significant than cash stockpile while comparing 2019 and 2020.