Discuss limitations of ratio analysis, Financial Accounting

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Question :

Financial analysts will use ratios to compare performance of companies in the same industry.

Lenders will frequently use ratio analysis to help them decide whether to lend to an individual in the first place and whether to continue their financial support. Business owners and managers also use ratios to assess the financial performance of their business. Such ratios may include earnings per share, interest cover, gearing and net profit margin.

Required:

(a) Explain the usefulness of ratios analysis to the above named users of accounts making reference to the three dimension of financial performance.

(b) As a potential shareholder indicate the ratios which will be of interest to you and the direction of these ratios.

(c) Discuss four limitations of ratio analysis.


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