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Financial Ratio Analysis Disadvantages

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Financial Ratio Analysis - Definition, Purpose, Advantages, and Disadvantages
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Financial Ratio Analysis - Definition, Purpose, Advantages, and Disadvantages
Meaning of Financial Ratios: Financial Ratios are essential quantitative financial tools that are comprehensively used by financial experts to analyze a company’s financial performance such as business evaluation, fundamental analysis, business analysis, etc. In financial ratio analysis, an expert uses ratio to study various financial parameters from a company’s financial statements such as income statement, balance sheet etc., for efficient and effect decision making.
Some of the financial ratios are listed below for …show more content…

Investment Bankers use ratios as a very important tool in assisting clients in the buy/sell side advisory.
• Companies in identifying gaps in the operation or departments and devising corrective steps to fill the gaps also use identifying Gaps and Finding Solutions- Ratios.
Limitation of Ratios
• Effect of external business environment – Sometimes external factors such as inflation etc. can have effect on the company’s performance and the use of ratios can be limited in such scenarios.
• Diversified Products/Industries- It is difficult to use ratios to evaluate big companies that work across different industries or location as it is difficult to find a common ratio/parameter to perform such analysis.
• Dependencies on Accounting Figures- Ratios depend heavily on accounting figures, which are themselves subject to a lot of approximations, diversities, assumptions, and manipulations.
• Interpretation- Ratios are subject to interpretation and can be impacted by some events that have taken place in the company. For example, a spin off may change the current ratio but it may not necessary reflect the operating performance of a

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