What is a disadvantage of relying solely on financial ratios?

Relying solely on financial ratios presents the disadvantage that these ratios can be influenced by different accounting practices, which may lead to misleading conclusions. Financial ratios summarize complex financial information into a single value, making them easier to understand and compare. However, the underlying figures can be affected by management decisions regarding accounting methods (such as depreciation methods or revenue recognition), which can vary significantly among companies. This means that while a ratio may appear healthy or unhealthy, it does not necessarily reflect the true financial condition or operational efficiency of a company if manipulated by accounting practices. Therefore, while financial ratios are a useful tool for analysis, they should be used in conjunction with other qualitative and quantitative factors to form a more accurate picture of a company’s overall performance.