What is a key limitation of using ratios for financial analysis?

Ratios are indeed valuable tools for financial analysis, providing quick insights into a company’s performance and financial health. However, they are not comprehensive on their own and should be used in conjunction with other financial information and qualitative assessments.

By relying solely on ratios, analysts may overlook important contextual factors such as industry conditions, economic environment, market trends, and the company’s unique circumstances. For instance, a high current ratio might suggest good liquidity, but without considering the industry standards or the company’s operational strategies, this ratio alone may not provide a complete picture of financial stability.

Therefore, while ratios can highlight important trends and areas for further exploration, they should always be interpreted alongside other data and qualitative insights to form a full understanding of a company's performance. This limitation emphasizes the importance of a holistic approach to financial analysis, reinforcing that ratios are just one piece of a larger puzzle.