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Limitations of financial ratio and examples

Asked Nov 2, 2005, 05:01 AM — 1 Answer
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Need help here to interprete the limitations of financial ratio and need examples... Thank you

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CliffARobinson Posts: 1,428, Reputation: 510
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Mar 16, 2012, 04:48 PM
Quote:
While financial ratio analysis can provide us with important insight into a company’s performance, a good financial analyst will be aware that there are some important limitations that should be noted when using financial ratios as an analytical tool in financial modeling.
A few examples of limitations:
Quote:
* Ratio analysis is a retrospective, not prospective examination.

* Ratio analysis is based on accounting not economic data.

* Ratios don’t capture significant off-balance sheet items.
Source: Financial Modeling Guide
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