Financial analysis is a powerful mechanism

Financial analysis is a powerful mechanism of determining financial strengths and weaknesses of a firm. But, the analysis is based on the information available in the financial statements. Thus, the financial analysis suffers from serious inherent limitation of financial statements. The financial analyst has also to be careful about the impact of price level changes, window dressing of financial statements, changes in accounting policies of a firm, accounting concept and conventions, and personal judgment etc.

Limitations of financial analysis are:

• It is only study of interim reports
• Financial analysis is based upon only monetary information and non monetary factors are ignored.
• It does hot consider changes in price levels
• As the financial statements are prepared in the basis of a going concern, it does not give exact position. Thus accounting concepts and conventions causes a serious limitation to financial analysis.
• Changes in accounting procedure by a firm may often make financial analysis misleading.
• Analysis is only a means and not an end in itself. The analyst has to make interpretation and draw his own conclusions. Different people may interpret the same analysis in different ways.