Historical Data Dependency

• Ratio analysis is based on past financial statements, which may not accurately reflect the current or future financial position of an entity due to changes in market conditions, economic factors, or management decisions.

Different Accounting Policies

• Companies may use different accounting policies for inventory valuation (FIFO, LIFO, or weighted average) and depreciation methods. These variations can lead to inconsistencies, making it difficult to compare financial performance across different organizations.

Ignores Non-Financial Factors

• Ratio analysis primarily focuses on quantitative financial data and overlooks qualitative factors such as management efficiency, employee productivity, market conditions, and brand reputation, which also play a crucial role in business success.