19.4. Limitations of Ratio Analysis

Try these first

1. 1.

   What does historical data dependence mean in ratio analysis?

   Hint

   Think about how past figures may or may not represent current reality.

2. 2.

   What is window dressing?

   Hint

   Consider why a company might want to look more profitable.

3. 3.

   What is one major limitation of ratio analysis?

   • It provides real-time data
   • It depends on historical data
   • It is universally applicable

   Hint

   Think about how useful past data is in predicting the future.

4. 4.

   True or False: Window dressing is a legitimate way to improve financial statements.

   • True
   • False

   Hint

   Consider if altering facts to look better is acceptable.

5. 5.

   You are analyzing a tech startup that has shown massive growth in revenue in recent years, but their net income has been unstable. Discuss how historical data dependence might affect your analysis.

   Hint

   What factors might affect their stability in the future?

6. 6.

   Consider two companies with identical liquidity ratios but operating in different industries. Discuss how differing accounting policies might impact your analysis.

   Hint

   What determines 'normal' for each industry?