FMA-II 2 of 3: Ratio Analysis

Ratio Analysis
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Although ratio analysis constitutes a very valuable tool for financial statement users, it is associated with several weaknesses. To begin with, ratio analysis tend to be misleading when it is used to analyze financial accounting data generated using accounting standards that incorporate diverse accounting policies. As such, assumptions and estimates made during the compilation of such accounting information impair the comparability of such data, thereby rendering ratio analysis ineffective. Secondly, ratio analysis only helps to demonstrate the past performance of firm rather than providing insight into the present and future performance of an organization. Consequently, ratio analysis is ineffective in revealing the position of a firm among competitors and providing current information to the users (Lasher, 2011).
Thirdly, ratio analysis also provides deceptive information when it is used to compare companies from unrelated indust...