What is the Ratios based on historic cost accounts
Ratios based on historic cost accounts don't give a true picture of trends, due to the effects of inflation and different accounting policies. Investors 'ratios specifically have a disadvantage, as investment means looking into the future and past may not always be indicative of the future.Comparing the financial statements of similar businesses can be misleading:
1 Use of different accounting policies (depreciation, non-current asset valuation, inventory valuation, capitalisation of borrowing costs etc.)
2 Companies may not be of similar size. One may be part of a large group and hence have access to economies of scale, which result in lower costs.
3 Companies may be operating in the same industry though they may have different markets, and thus different product ranges and sales mix. Segmental accounts are useful in this respect