Limitations
Despite usefulness, financial ratio analysis has some disadvantages. Some key demerits of financial ratio analysis are:
Different companies operate in different industries each having different environmental conditions such as regulation, market structure, etc. Such factors are so significant that a comparison of two companies from different industries might be misleading.
Financial accounting information is affected by estimates and assumptions. Accounting standards allow different accounting policies, which impairs comparability and hence ratio analysis is less useful in such situations.
Ratio analysis explains relationships between past information while users are more concerned about current and future information.