What Are the General Limitations of Ratio Analysis?
business accounts image by Nicemonkey from Fotolia.com jQuery(document).ready(function(){ jQuery(‘#jsArticleStep1 span.image a:first’).attr(‘href’,’http://i.ehow.com/images/a06/a7/f4/general-limitations-ratio-analysis_-1.1-800X800.jpg’); }); Financial ratio analysis looks at the company’s financial statements. Ratio analysis uses parts of a financial statement to compute various ratios, then, using a system known as benchmarking, compares the ratios of one company to those of another company or to the ratios for an industry. Ratio analysis is a widely used concept, but does have several limitations that must be considered before using the analysis. Accounting Methods Not all firms use the same accounting methods. For example, one firm could use straight-line depreciation while another firm uses double declining balance depreciation. Depreciation is a non-cash expense, so more depreciation will decrease net income for the period, even though performance wise, the company is not losing m
