The data must be absolutely correct.

3. Effects of Price Level Changes: Price levels changes often make the comparison of figures difficult over a period of time. Changes in price affect the cost of production, sales and also the value of the assets. Therefore, it is necessary to make proper adjustment for price-level changes before any comparison.

4. Quality factors are ignored: Ratio analysis is a technique of quantitative analysis and thus, ignores qualitative factors, which may be important in decision-making. For example, an average collection period may be equal to standard credit period, but some debtors may be in the list of doubtful debts, which is not disclosed by ratio analysis.

5. Effect of window dressing: In order to cover up their bad financial position some companies resort to window dressing. They may record the accounting data according to the convenience to show the financial position of the company...
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