The shortcomings of Financial Analysis

Essay by kittykathyJunior High, 7th gradeF, February 2005

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The main function for many users is to estimate the future. However estimation can only be made by interpretation of the past. There is thus a significant shortcoming in any interpretation as to its effectiveness in estimating the future.

Even if the needs of the user are more concerned with historical stewardship of the business, there are limitations of interpretation as the information presented to the user is of necessity summaries in some form. The summarization process may have the effect of distorting the nature of some of the information.

Finally, it should be noted that the emphasis on information produced by an undertaking is financial. In many cases, non-financial data would be useful in order to see a complete picture of the state of the organizatin. Non-financial data includes for example the number of empliyees in the organization and the type of skills they possess or indicator of efficienvy with which the organization addresses complanints from customer.