Ratios are useful but there are some limitations:
- They are calculated on past data and therefore may not be a true reflection of the businesses current performance.
- financial records may have been manipulated and therefore the ratios will be based on potentially misleading information.
- Ratios don't consider quantitive factors.
- A ratio can indicate that there are problems in a business but doesn't directly identify the cause of the problem or the solution.
- Interfirm comparisons can be difficult as not all firms report their performance in the same way or generate their accounts in the same way.
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