Limitations of Ratio Analysis
Ratio analysis is useful in many respect but it also has a few limitations.
- Ratios alone are not adequate for judging the financial position of a business. Information obtained from ratios must be used in conjunction with the information obtained from other sources to judge the financial position of a business.
- There are no well accepted standards for all ratios which can be accepted as norms.
- The items used in the calculations of ratios differ from one analyst to another.
- A single ratio has limited value. For a proper ratio analysis, complementary ratios also should be computed and studied.
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