Which of the following statements is not a limitation of ratio analysis?

• A. There are an insufficient number of ratios available.
• B. Ratios can be distorted by inflation.
• C. Differences in accounting methods can distort ratios.
• D. Ratios across time are always directly comparable.

Answer: (A)

Ratio analysis helps you understand a company’s financial health by comparing different figures to reveal relationships and trends. A common misconception is that there aren’t enough ratios to cover every situation. In reality, there are numerous ratios across liquidity, solvency, profitability, and efficiency, and analysts can tailor or combine them to fit the context. That breadth means the statement about an insufficient number of ratios isn’t a true limitation.

What are real limitations? Inflation can distort absolute dollar amounts on the financial statements, which in turn distorts ratios that rely on those figures. Different accounting methods, such as inventory valuation or depreciation, can change the numbers used in the ratios and therefore affect comparability across firms or periods. Also, ratios across time aren’t always directly comparable because changes in accounting policies, inflation, or one-time items can alter the base numbers. Together, these factors explain why ratio analysis can be limited in its comparability and usefulness.