Although ratio analysis is very important tool to judge the company's performance , there are some limitations also. The major constraints or limitations of ratio analysis can be pointed out as follows:
1. Only Quantitative Analysis
Ratios are tools of quantitative analysis, which ignore qualitative points of view. So, it is not useful to understand the qualitative aspects of the business
Ratios are tools of quantitative analysis, which ignore qualitative points of view. So, it is not useful to understand the qualitative aspects of the business
2. Distortion
Ratios are generally distorted by inflation. So, it may provide incorrect information.
Ratios are generally distorted by inflation. So, it may provide incorrect information.
3. Chance Of False Result
Ratios give false result, if they are calculated from incorrect accounting data.
Ratios give false result, if they are calculated from incorrect accounting data.
4. Not Suitable For Future Forecasting
Ratios are calculated on the basis of past data. Therefore, they do not provide complete information for future forecasting.
Ratios are calculated on the basis of past data. Therefore, they do not provide complete information for future forecasting.
5. Misleading
Ratios may be misleading, if they are based on false or window-dressed accounting information.
Ratios may be misleading, if they are based on false or window-dressed accounting information.