Discuss five limitations to ratio analysis. What will be an ideal res

Discuss five limitations to ratio analysis.

What will be an ideal response?

ANSWER

There are six limitations discussed in the text:
1. Industry identification is difficult.
2. Industry averages are only approximations.
3. Accounting practices differ widely among firms.
4. Financial ratios can be too high or too low (e.g. current ratio).
5. The industry average may not be ideal.
6. Seasonality in firm operations causes ratios to vary with seasons.