Limitations of ratio analysis, usefulness of cash flows and EPS as a performance measure
You'll learn why financial ratios alone don't tell the whole story when comparing company performance, and why cash flows and earnings per share deserve equal attention in your analysis.
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In this lesson
- 0:00 Limitations of interpretation techniques overview
- 0:33 How accounting policies affect ratio comparability
- 2:04 Related party transactions and their impact
- 3:15 Why year end figures can be misleading
- 4:04 Additional limitations of ratio analysis
- 6:10 Why cash flows matter more than profit
- 8:10 Earnings per share as a performance measure
- 9:31 Limitations of earnings per share
- 10:50 Worked example: ROCE comparison analysis
About this lesson
This session explores the key limitations of ratio analysis—from accounting policy differences and related party transactions to year-end distortions—that can make comparisons misleading. You'll discover why cash flow information matters more than profit for assessing liquidity and creditor confidence, and how earnings per share provides a better performance trend than profit alone by accounting for changes in share capital. Through worked examples, you'll see how to recognise when ratios are being distorted by factors unrelated to operational efficiency, equipping you to make sharper judgements in FR, SBR, and strategic case studies.
Duration: 15m
Transcript
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