ADVANTAGES OF RATIO ANALYSIS:

It helps to validate the financing, accounting and operating decisions of the firm.

Helps the management to compare and evaluate the financial position of the firm and the result of
their decisions.

It simplifies complicated accounting statement and financial data into simple ratios of operating
efficiency, financial efficiency, solvency and long term positions.

Ratio analysis help identify problems and bring the attention of the management to such areas. If
some of the information is lost in the complex accounting statements, and ratios will show the
problems

Allows the company to conduct comparisons with their competitors, industry standards etc. This will
help the organization to understand their fiscal position in the economy in a better manner.

DISADVANTAGES OF RATIO ANALYSIS:

The firm can make some year-end changes to their financial statements, to improve their ratios.
Then the ratios end up being ineffective.

Ratios do not take into account the price level changes due to inflation. Many ratios are calculated
using historical costs, and they do not see the changes in price level between the periods. This does
not reveal the correct financial situation.

Accounting ratios totally avoid the qualitative aspects of the firm. They only take into consideration
the monetary respects.

The ratios are not well defined. So firms have a chance of using different formulas for the ratios. One
such example is Current Ratio, where some firms take into consideration all current liabilities but
others ignore bank overdrafts from current liabilities while calculating current ratio

accounting ratios do not resolve any financial problems of the company. They show the existing
problems but do not give the actual solution