Limitations

• what is ratio analysis

  the comparison of financial data to gain insights on business performance
• whys it important

  -need to compare with competitors

  -need to analyse over time (trends)
• where does the info come from

  income statements, balance sheets
• 3 main types of ratios

  -profitability

  -liquidity

  -financial efficiency
• limitations of ratios

  -one data set is not enough

  -how reliable is the financial data?

  -ratios are based on the past

  -comparability - be careful with comparing rations
• why might they not be reliable

  -financial information involves making subjective judgments

  -different business have different accounting policies

  -potential for manipulation of accounting information