We will look after the benefits and Limitations of Ratios Analysis.
A ratio is an expression of relationship between two variables. So, it is a yardstick that measures relationship between two variables.
Major Benefits of ratio analysis:
1. Useful in analysis of financial position
2. Useful in simplifying accounting figures.
3. Useful in comparison of inter firm.
4. Helps in a general assessment of liquidity, solvency, profitability, and efficiency of the firm.
Limitations of Ratios Analysis
Despite having many benefits of the ratio analysis, it has some limitations as well. Hence, the user of it always be careful before use of it:
Following is the limitations:
1. False results if based on incorrect accounting data:
The calculated ratio will be correct only if the financial statement represented are correct. But everyone knows that accounting data can be manipulated therefore there will be least chance of correct calculation of ratio.
2. No idea of probable happening in Future.
3. Variations in accounting methods.
4. No effect in price level change.
5. No common standard.
Other Important Links:
Ratio Analysis Meaning and Formula: CLICK HERE