Limitations of ratio analysis
(i.) Differences in accounting policies may detract from the value of inter-firm companies; It is used to prepare sales day book.
(ii) It could be distorted as a result of ‘one off’ transactions;
(iii) Where a business undertakes a mix of activities, it is important to calculate
(iv) Where a business undertakes a mix of activities, it is important to calculate
(v) Significant non-monetary items are excluded in the financial statements
(vi) Financial statements are usually based on historical cost
(vii) A deterioration in accounting ratios cannot necessarily be interpreted as a result of poor management.
(viii) External users ability to obtain further information in addition to computed ratios varies considerably.
(ix) The effect of inflation limits the use of ratios when different periods are compared. .
(x) Misleading comparisons arise if ratios are not calculated uniformly. .
(xi) External users may not have the ability to calculate ratios because published accounts do not disclose sufficient information for the interpretation.
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