Timeliness of information

In a traditional ratio analysis timeliness is one of the biggest limitations. If you’re looking at a set of published accounts in November 2008 they probably relate to a year end dated December 2007 and contain data relating to the two periods starting January 2005 and ending December 2007. Some of the data is therefore up to four years old. Several things could have happened over this time, including the following.

Inflation

The stated value of such things as sales may seem smaller than they are if they relate to a period four years ago. For example, £1 million pounds four years ago could be the equivalent of £1.2 million today if there had been 5 per cent inflation each year.

Technology In a high technology business the balance of the fixed (non- current) assets on the balance sheet could vary quite a lot over a four-year period.

Accounting policies and practices

Again using the high technology business, it’s not unprecedented for the accounting treatment of these fast- moving fixed assets to have changed. If you take computers, they used to last up to four years and be depreciated over that period. Now many companies depreciate them over just two or three years.

Changes in interest rates

A company four years ago may have had a high interest burden and may be considered as risky. But if this was not due to a large loan but to high interest rates, and interest rates go down, the risk also looks much less.