Financial ratio analysis is limited by the use of alternative accounting
methods. Accounting methods play an important role in the
interpretation of financial ratios. The lack of consistency across
companies makes comparability difficult to analyze and limits the
usefulness of ratio analysis.
Financial Reporting And Analysis MCQ - Financial Reporting And Analysis Section 2
Financial ratios alone are not sufficient to determine the
creditworthiness of a company. Other factors must also be considered,
such as examining the entire operation of the company, meeting with
management, touring company facilities, and so forth.
Statement A is incorrect because ratios explain what happened, but do
not explain why it happened. Statement B is incorrect because ratios
allow comparison of different sized companies.
The microeconomic relationships within a company are the insights that
the ratio analysis provides. Hence, this is not a limitation.
The cross-sectional analysis allows for comparing a specific metric for a
company with the same metric for another company.
