Question 2.9: What are the potential problems associated with using ratio ...

The problems that may be encountered in using ratio analysis to assess the health and performance of companies include:
– all ratios are imperfect and imprecise and should be treated as guidelines;
– ratios are only as reliable as the accounting figures they are based on;
– no two companies are identical so inter-company comparisons need care;
– ratios mean little in isolation and need other information to explain them;
– ratio analysis tends to be performed on historical data and so may not be an accurate guide to either current position or future activity.