Which of the following is NOT a limitation of ratio analysis?

• A. It always provides exact future results.
• B. Ratios do not show seasonal fluctuations.
• C. It allows direct comparisons between all companies.
• D. It reveals all non-financial factors.

Answer: (B)

Ratio analysis is a valuable tool, but it has clear limitations. It relies on historical figures, so it cannot guarantee exact future results. It can be affected by different accounting policies and practices, making direct comparisons across all companies risky unless you compare like with like within the same industry. It also focuses on financial data and doesn’t capture non-financial factors such as management quality, market conditions, or competitive position. The statement that ratios do not show seasonal fluctuations isn’t a fundamental limitation—by examining ratios across multiple periods (like quarterly figures), you can observe seasonal patterns and seasonality effects. That flexibility means this particular point isn’t a drawback inherent to ratio analysis in the way the others are.