Question

he text refers to Financial Analysis has its limitations … how so?

Answer 1

Financial analysis is very important for different aspects of analysing investment into a particular asset. It has its limitations too.they are as follows-

1. Financial analysis is based upon the analysis of financial statements of company which are based upon the historical cost of different Assets and liabilities, so so they provide with figures which are not updated in nature and it can lead to unfair analysis.

2. Financial analysis cannot be used in isolation as it is highly wide form of analysis and there is no clear approach so it has to be very open in nature, else the purpose of financial analysis will fail. Most people tend to couple the financial analysis with technical analysis.

3.financial analysis is highly quantitative in nature and it does not account for the qualitative factors Hence, this does not provide the complete picture of the company.

4. There is a high level of dispersion among various analysts about how they analyse a particular company and they could be highly prejudiced in nature and sometimes highly optimistic too.

5. There is no precision in financial analysis as this is not an accurate and guaranteed kind of analysis. This does not provide with the assurance of successful investment.

6. Financial statements are often Misstated according to the the convenience of the company so depending completely upon the financial statement can be hazardous at times and financial analysis suffers from the same.