What are the limitations of ratio analysis in financial evaluation?

What are the limitations of ratio analysis in financial evaluation?

Ratio analysis is useful, but it has limitations such as not considering qualitative factors, historical context, and industry differences.

Can you explain why qualitative factors are important?

Qualitative factors, like management quality and market conditions, can significantly impact a company's performance but aren't captured in ratios.

How does historical context affect ratio analysis?

Historical context is crucial because ratios can vary over time due to changes in economic conditions, making comparisons misleading.

What are some common ratios used in analysis?

Common ratios include the current ratio, debt-to-equity ratio, and return on equity, each serving different analytical purposes.

Are there alternatives to ratio analysis?

Yes, alternatives include trend analysis, cash flow analysis, and benchmarking against industry standards.