Learning Materials For Accounting, Management , Finance And Economics.

Saturday, March 6, 2010

Limitations Of Ratio Analysis

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

2. Distortion

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.

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.

5. Misleading

Ratios may be misleading, if they are based on false or window-dressed accounting information.