Outline four limitations of the use of ratios as a basis of financial analysis.

CPA-Financial-Management-Section-3 Revision kit

Limitations of ratios
– They are based on historical data
– They are easy to manipulate due to different accounting policies adapted by the firms
– They are only quantitative measures but ignore qualitative issues such as quality of service, technological innovations etc
– They constantly change hence are computed at one point in time e.g. liquidity ratios change now and then
– They don‟t incorporate the effect of inflation
– They don‟t have standard computational purposes, firms are of different sizes

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