[lovethogoo]

Please I want to know what financial ratio is, and also its limitations.

[morgaine300]

There are about 3 billion financial ratios. (A bit of an exaggeration, but hopefully made the point that you need to narrow things down a bit.)

(I've also seen that question about the limitations on them before, which I suspect is a homework question. If so, we have guidelines about posting homework -- we're not here just to answer things for you. You need to make an attempt to do your own work first.)

[anushkag]

Financial ratio analysis is the selection, evaluation and interpretation of financial data in easier to understand ratios, which have been identified as critical indicators of financial performance of the business and can be used for strategy and decision-making. Financial ratio analysis is popularly used to compare a firm's financial performance over a period (trend analysis) or to assess performance in comparison to other businesses.

But as much as ratio analysis can help you, it can also mislead. Here are some limitations of the Financial Ratio Analysis:

1. Many ratios are calculated on the basis of the balance-sheet figures. These figures are as on the balance-sheet date only and may not be indicative of the year-round position.

2. It gives current and past trends, but not future trends.

3. Ratio analysis is based on accounting not economic data.

4. Ratios can provide meaningful comparisons of companies in similar industries or of a company in a single industry. As such, financial ratios should be evaluated in comparison to other companies in the same industry. For businesses that have operations in more than one industry, ratio analysis is less meaningful.

5. Ratio comparisons can be meaningful only, if data is truly comparable

Hope this will help. You can visit Fintel Website (FINTEL- Business Benchmarking Tools | Financial Benchmarking Tools | Industry Data | Industry Standards) for more info.

[morgaine300]

Thread is a year and a half old.