ratio analysis

Question 1

what are the purposes of ratio analysis

Answer 1

-To compare the performance of the business with previous years

-To compare the performance of a business to its competitors’

-To compare against industry averages

-To highlight areas of the business that need attention

-To highlight trends to aid future decision-making

Question 2

what are the limitations of ratio analysis

Answer 2

-Ratio information is historical – not relevant to the current or future position.

-Ratios do not take into account external factors e.g. recessions

-Ratios do not take into account internal factors, e.g. low staff morale.

-Ratios do not take into account product developments.

-It is difficult to find competitors of the exact type and size to make valid comparisons.