Limitations of Financial Ratio Analysis

 Ratio analysis is a retrospective, not prospective examination.

 Ratio analysis is based on accounting not economic data.
 Ratios don’t capture significant off-balance sheet items.
 Basic ratios can be manipulated through acceptable alterations of accounting
policies (e.g., LIFO/FIFO).
 Financial statement accounts reflect historical cost not necessarily current
economic value.
 Cash flow measures have been proven to be more closely correlated with stock
price movement that income based measures.