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Purpose of Ratio Analysis

• ratios help compare current performance with previous records
• ratios help compare a firm’s performance with similar competitors
• ratios help monitor and identify issues that can be highlighted and resolved
• ratios help with future decision making

Limitations of Ratio Analysis:

• ratio analysis information is historic – it is not current
• ratio analysis does not take into account external factors such as a worldwide recession
• ratio analysis does not measure the human element of a firm
• ratio analysis can only be used for comparison with other firms of the same size and type
• it may be difficult to compare with other businesses as they may not be willing to share the information