Ratio analysis is a popular technique of financial analysis. It is used to visualize and extract information from financial statements. Three Financial Statements The three financial statements are the income statement, the balance sheet, and the statement of cash flows. These three core statements are.
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.
Seasonal effects: An analyst should be aware of seasonal factors that could potentially result in limitations of ratio analysis . The inability to adjust the ratio analysis to the seasonality effects may lead to false interpretations of the results from the analysis. Manipulation of financial statements: Ratio analysis is based on information ...
Due Diligence Due diligence is a process of verification, investigation, or audit of a potential deal or investment opportunity to confirm all relevant facts and financial information, and to verify anything else that was brought up during an M&A deal or investment process. Due diligence is completed before a deal closes.
Hence, ratio analysis may not accurately reflect the true nature of the business, as the misrepresentation of information is not detected by simple analysis. It is important that an analyst is aware of these possible manipulations and always complete extensive due diligence. Due Diligence Due diligence is a process of verification, investigation, ...