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Financial Management: Limitations of Ratio Analysis

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Complete a critical analysis of the limitation of ratio analysis for evaluating a company's financial health and future prospects.

Also, discuss ways to avert the limitation of ratio analysis.

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Solution Summary

Ratio Analysis is one of the most widely used method to analyze a company's performance and its financial health. This post analyses different limitations of ratio analysis method and how these limitations can be overcome

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This report is designed for developing knowledge about different limitations of ratio analysis technique for evaluation of a company's financial health and future prospects. It will also provide different ways or suggestions that can be adopted for overcoming the limitations of ratio analysis.

Ratio Analysis:
Ratio analysis can be defined as the quantitative analysis technique that is taken into account for evaluating the financial performance of a company based on its financial statements. The income statement and balance sheet are the two financial statements that are most commonly used for conducting ratio analysis on a company (Bragg, 2012). Ratio analysis techniques establish the relationship between two or more items of financial statements. The financial ratios can be categories into different categories such as market value ratios, liquidity ratios, profitability ratios and leverage ratios.

Limitations of Ratio ...

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