What are the uses and limitations of using ratio analysis?

Limitations of using ratio analysis:

• The information is historical, and it is too late to do anything about it
• Comparisons are difficult – different conditions apply in different years, and no two companies are the same
• Ratio analysis only covers financial information. It does not take into account any other factors such as the quality of staff or the location of the business. These may have a big influence on the performance of a business
• Ratio analysis does not take into account general business condition such as inflation, and interest rates which affect the firm and the economic environment

Uses:

• To compare current year’s performance with the previous year
• To compare performance with rivals
• To interpret in order to im