FINANCIAL RATIO ANALYSIS -

LIMITATIONS
Ratios are reliable as the accounting data on which they are based.
With the exception of disclosing upper and lower quartile values, firms that compile industry norms often
do not report information about the dispersion, or distribution, of the individual values around the mean
ratios.
Valid comparative analysis depends on the availability of data for appropriately defined industries.
Some industry classifications are either too broad or too narrow to be reliable sources of comparative
data.
It is important to remember that financial ratios provide a historic record of the performance and financial
condition of a firm. Further analysis is required before the historic record can be used as basis for future
projections.
Comparisons of a firm’s ratios with industry norms may not always be what they seem. Ratios comparing
unfavorably with industry norms should be construed as red flags – not signals of impending doom.