Purpose and limitations of Ratio Analysis - Ratios - Higher Business management Revision - BBC Bitesize (2024)

FAQs

What is ratio analysis in a level business? ›

Ratio Analysis looks at the pairing of financial data in order to get a picture of the performance of the organisation. Ratios allow a business to identify aspects of their performance to help decision making.

It helps in determining how efficiently a firm or an organisation is operating. It provides significant information to users of accounting information regarding the performance of the business. It helps in comparison of two or more firms. It helps in determining both liquidity and long term solvency of the firm.

RatiosRatio analysis

It is often necessary to compare a firm's performance or different organisations' performance over a number of years. Ratio analysis can be used to compare the year to year profitability, liquidity and efficiency of a business or similar businesses.

Some of the most important limitations of ratio analysis include: Historical Information: Information used in the analysis is based on real past results that are released by the company. Therefore, ratio analysis metrics do not necessarily represent future company performance.