What Are the Limitations of Ratio Analysis?

Ratio analysis method (Ratio analysis method): It is an analysis method that analyzes the financial status and operating results of an enterprise and understands the development prospects of the enterprise through the calculation of the relevant indicators of the financial statements. [1]

Ratio analysis

In financial analysis, ratio analysis is the most widely used, but it also has limitations.
(1) The items to be analyzed must be comparable and relevant, and it is meaningless to compare unrelated items;
(2) The consistency of the comparison caliber, that is, the numerator and denominator terms of the ratio must be consistent in caliber in terms of time and range;
(3) The selection criteria must be scientific and pay attention to factors such as industry factors and differences in production and operation conditions;
(4) Pay attention to organically linking the various ratios for a comprehensive analysis. Do not look at one or a certain type of ratio in isolation, and combine other analysis methods. Understand and achieve the purpose of financial analysis. [5]

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