Question

You have been asked to evaluate investment options for a large private investment fund; identify some drawbacks to a purely fundamental (Ratio) analysis.

Answer #1

Drawbacks of purely fundamental analysis are-

A. fundamental ratio analysis is highly dependent upon the quantitative ratios and quantitative ratios will not be reflecting the true state of performance of the company because there are qualitative aspect to the performance of a company

B. Fundamental ratio analysis will be based upon the historical cost and it will not be representing the true analysis

C. Books of accounts of various companies are not representing the true status and they are manipulating various figures so that analysis will not be appropriate.

D. Ratio analysis is a past information analysis and it is not related to futuristic analysis so it will not be providing adequate information about future of a company

E. Markets are efficient in discounting the past information so, it will not be providing any additional advantage for gaining through price discrepancy.

F. Ratio analysis are also not flexible in nature and they will be highly rigid calculations which are just taking quantitative consideration so they will not help in proper decision making without the qualitative aspect of decision making.

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