What is a significant limitation of using ratios to analyze a business?

Using ratios to analyze a business presents various limitations, and one significant drawback is that ratios do not take into account qualitative factors such as staff relations or morale. These aspects can heavily influence a company's performance and overall success, but they are not readily captured by numerical data included in financial statements.

Ratios primarily rely on quantitative data, such as revenue, expenses, and profits, which can give a partial picture of a company's health. For example, while financial ratios might indicate profitability or efficiency, they cannot assess how motivated employees are, how well teams work together, or the presence of a supportive work environment—all of which can impact productivity and, subsequently, financial performance. Thus, while ratios can help highlight certain trends or areas for improvement, they fall short of providing a holistic overview of a business's situation when it comes to the human element, which is critical for long-term sustainability and growth.