19.5 LIMITATIONS OF FINANCIAL RATIO ANALYSIS
Those who use financial ratio analysis for decision-making purposes must also be aware of its limitations. This analysis cannot be a true guide to a firm’s performance as it does not help the analyst go deep into operational intricacies. For example, if a firm does not maintain a sound depreciation policy and declares large profits, high profitability ratios would simply be deceptive. With any breakdown of machines, the production process would be severely interrupted and the profitability ratio would unexpectedly show a sharp decline.
Again, the prices of the output as well as of the current assets change frequently which may produce distortions in accounting measures of performance and financial ...
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