Limitation of Ratio Analaysis

Topics: Ratio, Future, Inflation Pages: 2 (544 words) Published: February 28, 2012
As the result of the ratio analysis. There are 5 limitations of ratio analysis as well. The first limitation of the ratio analysis is Comparing the ratios between two organizations/firms is a smooth path to do it. This is because, different organization/firms might have face unequal figures of earnings, losses. In addition, fact is the two difference organizations/firms might have different economic environment or production technologies even though they produce the same range of the product. For an example, Company (A) produce 100 Android smart phone in the month of March 2011 due to the month of February 2011 they have achieved a high amount of pre order sales when they first-launched the Android smart phone. Unfortunately, Company B produce only 50 Android smart phone in the month of March 2011 due to the production technologies that they had is not eligible to produce more Android smart phone. Not only this, Inflation should be concern as well, when inflations hits, firm's balance sheet may have badly distorted by inflation. In this incidents, the comparison and information might lead low accuracy. For an example, buyers of the world might get lesser due to the inflation rate increased, and could defined as too many cash chasing over one item, might causes bad sign of the economic. Therefore, this is one of the limitation of ratio analysis. Ratio are not predictive in future, this is because, the information that they gained were from history fact. It could be use as previous statement of the company, it could not predict what comes in future. Ratio are static as of year-end, they do not apply in future flow. For an example, the year of 2011, Company C has hit a maximum profit of $1.7 million nett, but in the ratio analysis, it could not predict that in the future 2012, Company C will hit again a maximum profit. Base on the historical information the ratio can be used as a tool to assist financial analysis. In order to get correct interpretations, a single...
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