Question

What are some uses and limitations of financial ratios?

Answer 1

Uses of financial ratios are as follows:

1. Ratios are considered to be helpful in analyzing the performance trends over a long period of time.
2. Ratios also enable a company to compare the financial results to those of the competitors.
3. It is also useful for the companies in decision making.
4. It also helps in pinpointing the weak areas as well as strong areas.
5. It also useful in pointing problems.

LIMITATIONS:

1. Ratio doesnt does into account the price level changes due to inflation. Many ratios are calculated using historical data and thus they ignore the price level change between the periods and as a result it doesn't reflect the correct financial situation.
2. Accounting ratios do not resolve any financial problem of the company.
3. There is no standard definition of ratios as a result of which the firms may use different formula to find the ratios.

Thus this are the uses and limitations of financial ratio.