Advantages And Disadvantages Of Ratios

Question 1

Advantages of ratios

Answer 1

Can be easier to understand than absolute numbers
Easier to look at changes over time
Can benchmark the performance of a business against competitors ratio
Can be used to set targets for managers
They put the performance of the business into context

Question 2

Disadvantages

Answer 2

Ratios are not very useful on their own -need a comparison
Gain meaningful comparisons you need to adjust for inflation over time
Different companies may use different accounting policies making comparison difficult
Ratios focus attention on past performance rather than the future
Focus on financial results and ignore qualitative factors such as staff morale