Which of the following statements about financial statement analysis is most correct?

a. The current ratio is the best available measure of liquidity.

b. Du Pont analysis is based on the fact that return on equity (ROE) can be expressed as the sum of four other ratios.

c. It is relatively easy to interpret a ratio in the absence of comparative data.

d. There are no limitations to financial statement analysis, so analysts can always be confident of their conclusions.

e. None of the above statements is correct.

The current ratio, which measures the coverage of current assets against current liabilities, though used widely faces the limitation that it does not adequately reflect how well a company pays-off its short term debt. In simple terms, a high current ratio indicating how well a company pays short term debt is not forcefully appreciated in a given economic condition. as it is affected by elements such as time for collectinig bills. This is why to move in line with the going-concern principle, the acid test ratio is the best available measure of liquidity.

Du pont analysis is a form of financial ratio tools that comprises of 3 other financial ratios to provide better comprehension of the Return on Equity of a company. That is Net Profit Margin, Asset Turnover and Totat assets to Total equity ratios.

Interpretation of financial ratios requires the use of data so as to provide a comparison and determine the changes in the financial position of a company.

There are existing limitations to financial statement analysis such as the effect of inflation, the fact that data used for comparison is based on past information and it becomes to hard to predict the future. Considering these, analysts should rather be careful when communicating financial information.