Limitations
You'll learn the key limitations of ratio analysis and why they matter for interpreting financial statements accurately. This video covers five critical constraints: different accounting policies between companies reduce comparability, management may manipulate results when ratios are heavily emphasised, industry
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In this lesson
- 0:00 Ratio analysis overview and limitations
- 0:21 How accounting policies affect comparisons
- 0:36 Management manipulation and ratio focus
- 0:52 Industry context and benchmark importance
- 1:10 Historic data and inflation limitations
- 1:27 Practice question on ratio limitations
About this lesson
context affects what benchmarks mean, ratios use historical data so they can't predict the future, and inflation can distort comparisons over time. Understanding these limitations is essential for FM, SBR, and other papers where you'll analyse financial performance—it shows examiners you can think critically about what ratios actually tell you, not just calculate them. You'll also work through a typical exam-style question to practise identifying true statements about ratio analysis and when it's genuinely useful as a decision-making tool.
Duration: 3m
Transcript
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