Historical

• Financial ratios are based on historical results and do not represent the real time status of a business. The pace of change can make financial ratios misrepresent the actual strength of a company, especially in industries with seasonal effects or rapidly changing conditions. While the past performance of a company can be used as a basis for understanding the potential for future results, the calculations should be measured against current news events, economic conditions and industry changes for a more accurate perspective.
  
  

Comparability

• Ratios are often used to compare businesses, but they may not represent an equivalent view of each business. The numbers extracted from financial statements may not be based on the same assumptions or valuation methods. Different accounting methods, price levels and financial strategies can distort the comparison. Ratios are better at notating trends within the same company than for establishing rankings against competitors. The strongest comparison using financial ratios is a cross-section analysis that compares companies in the same industry and makes adjustments based on noted differences.
  
  

Range

• Financial ratios do not have established ranges that represent a "good" or "bad" ranking. Values can vary based on industry, reference point, general economic situation and company events. Ratios provide a way to track changes, but do not provide specific results for a company. Reviewing raw ratio numbers without historical context does not present a comprehensive analysis method. For example, a recent corporate acquisition could temporarily distort the available cash or performance ratios of a company. Reviewing multiple ratios taken from different time periods can illustrate the overall trends and notate temporary deviations.
  
  

Methods

• You can calculate many financial ratios using different methods. Viewing ratios as declared by a company, financial analyst or financial publication does not indicate the underlying methodology used for the calculation or the information source. When accuracy is needed, ratios should be calculated using the exact same method and similar source documents.