Major limitations or disadvantages of ratio analysis can be studied as follows:
1. Based On Past Information
Ratio analysis is based on the financial statements which provide historical financial data and information. So, it may not be helpful in predicting the future of the business.
2. Ignores Qualitative Factors
Ratio analysis considers the monetary or quantitative aspects of the business. It does not address qualitative factors like quality, employee morale, customer satisfaction etc. which are essential for the success of the business.
3. Chance Of False Result
Ratio analysis is based on the data and information received from financial statements. There are several limitations of financial statements also. So, ratios may provide wrong result because of wrong financial data.
Ratio analysis may suffer from the personal bias of analyst because it is largely depends on the personal judgment.
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5. Fails To Disclose Current Worth
Ratios are based on historic data and information. So, ratio analysis does not disclose current worth of the company because of changes in price level.
