Limitations of financial ratios

1. Ratios are computed at a specific point in time.
2. Ratios ignore the effect of inflation in performance which is a vital part in the daily business management
3. The comparison between firms is often done even for firms with differences in size and technology
4. Ratio analysis engages the use of historical data contained in financial statements which may be irrelevant in decision making.
5. The different accounting policies applied by firms in similar industries say in depreciation calculation is a hindrance to comparison.

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