Discuss the limitations of ratio analysis.

Business & Finance
Tutor: None Selected Time limit: 1 Day

We will discuss the various ratios in the seminar tonight, along with their uses. We will also touch on limitations. As with the discussion question in unit 1, I would like you to relate this question to your own place of employment if possible. Discuss the limitations of ratio analysis and how they relate to your particular industry. They will be the same for many industries, but I want you to think about their uses in your particular company as if you work in the finance department.

Nov 21st, 2015

Thank you for the opportunity to help you with your question!

Limitation of Ratio Analysis

  • Quantitative measure not Qualitative
At best ratio analysis is a quantitative measure, it only makes sense out of the financial statements but cannot provide the cause or reason as to why something is lacking or what needs to be done to correct the event. Take for example Profitability ratio may suggest that your company makes less profit than your competitors, but this information does not give you the cause or the action that should be applied.
  • Ratio analysis does not apply when comparing companies under different industries

Please let me know if you need any clarification. I'm always happy to answer your questions.
Nov 21st, 2015

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Nov 21st, 2015

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