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Ratio analysis provides a lot of information on a companyregarding debt, liquidity, profitability, efficiency, per-sharemetrics, and relative value (Byrd, Hickman, & McPherson, 2013).However, there are potential pitfalls to using ratio analysis tomeasure a company. For example, comparing these numbers to theindustry average might not be the best idea (Carlson, 2019). Theindustry average is, well, average; most people want to invest incompanies that are more than even above average. To avoid thisissue, potential investors should compare ratios to industryleaders instead. Another problem with ratio analysis is inflation(Carlson, 2019). Inventory depreciation is affected by inflation,so ratios, when compared over time, might not reflect what is goingon with a company. To combat this issue, potential investors orfinancial managers should adjust the ratios to account for theinflation rate when comparing numbers over different periods. Amore significant issue with ratio analysis is that ratios do notprovide the “why,” only the “what” (Carlson, 2019). While doing theweek five assignment, I noticed that Starbucks invested a lot ofmoney and took on a lot of debt in 2018 (Starbucks, n.d.). Thisdramatic change was due to an acquisition in East China (Starbucks,n.d.). Without that information, the ratios may not make sense.Considering their assets, liabilities, income, and a bunch of othermetrics dramatically changed, so did all of their ratios.
