Question

Bring out the limitations of ratio analysis.

Answer 1

1. Consistency in preparation of financial statements: Inter-firm comparisons with the help of ratio analysis will be meaningful only if the firms follow uniform accounting procedures consistently.
2. Non-availability of standards or norms: Ratios will be meaningful only if they are compared with accepted standards or norms. Only few financial ratios have universally recognized standards. For other ratios, comparison with standards is not possible.
3. Change in price level: Ratio analysis may not reflect price level changes and current values as they are calculated based on historical data given in financial statements.