What are the general limitations of ratio analysis?


Quick Answer

Some limitations of ratio analysis are that it can only be used to look at historical results, it doesn't take inflation into account, it doesn't account for changes in the operational structure or accounting policies, and it can be hard to determine what caused a ratio to change. Some other limitations are that it can be hard to compare the ratios of two different companies, and the ratio analysis may not be helpful if there was a major change before or after the financial data used was reported.

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Full Answer

The limitations of ratio analysis make it harder for a company to use the results for future planning as the company's financial situation may have changed. In addition, although the ratios tell what changes occurred, they don't give a reason why. Therefore, companies should also look at current performance, investigate any organizational or accounting changes and use some other methods to understand their financial positions.

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