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Define ratio analysis and its limitations

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What can managers and investors learn from ratio analysis? What are the limitations of ratio analysis?

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According to Loth (n.d), Ratio analysis is not just comparing different numbers from the balance sheet, income statement, and cash flow statement. It is comparing the number against previous years, other companies, the industry, or even the economy in general. Ratio looks at the relationships between individual values and relates them to how a company has performed in the past and might perform in the future

Brigham and Houston (2007) looked at how three groups used ratio analysis managers, credit analysts, and stock analysts. Managers used ratio analysis to help analyze, and control with the intent to improve the ...

Solution Summary

Ratio analysis comprises of calculation and interpretation of strategic financial performance pointers to give insight that benefits stakeholders.