Question

Discuss the limitations of financial ratio analysis.

Answer 1

Limitations of ratio analysis are:
1. It focuses on historical data and is used to predict future growth or performance of a firm which maty be wrong.
2. It ignores qualitative analysis it doesn't take into account the differences due to accounting practice. The inventory calculation methods are not taken into consideration. Higher current assets may not show the true picture as higher current assets may be due to higher obsolete inventory.
3.Indicator only of the problem: They indicate only the problem and not the cause of the problem and does not provide solution to any financial problem