One disadvantage of ratios is that they often focus on what aspect of financial performance?

The focus on past performance is a key characteristic of financial ratios. Ratios are primarily based on historical data extracted from financial statements, such as income statements and balance sheets. This reliance on historical figures means that ratios reflect what has already occurred rather than providing insights into future projections or market conditions.

Using past performance can be beneficial for analyzing trends and understanding how a business has operated over a specific time frame. However, this also means that ratios may not account for current market dynamics, changes in consumer behavior, or emerging economic conditions. Investors and stakeholders may need to consider additional factors and forecasts for a comprehensive view of a company’s potential performance going forward.

In contrast, options that focus on projected earnings, future market trends, or current cash flow would require data interpretations beyond what the historical-based ratios provide, highlighting the limitation of ratios in predicting or reflecting future performance accurately.