Why Ratio Analysis Has Limits in Financial Decisions?
Ratio analysis is a very common technique for evaluating the finances of a company. However, it has several disadvantages. Ratio analysis is highly dependent on the historical information about the company and thus may not be able to accurately evaluate the company based on the latest changes in the market situation. Moreover, ratio analysis does not take into account any qualitative criteria, including the efficiency of management and the trends of the industry. The limitations of ratio analysis should be taken into consideration by an investor.