Limitation of Ratio Analysis

Accounting Information
Different Accounting Policies
The choices of accounting policies may distort inter company comparisons. Example IAS 16 allows valuation of assets to be based on either revalued amount or at depreciated historical cost
Creative accounting
The businesses apply creative accounting in trying to show the better financial performance or position which can be misleading to the users of financial accounting
Information problems
Ratios are not definitive measures
Ratios need to be interpreted carefully. They can provide clues to the company’s performance or financial situation
Outdated information in financial statement
The figures in a set of accounts are likely to be at least several months out of date, and so might not give a proper indication of the company’s current financial position.