1. Dependence on Accurate Financial Statements: Ratio analysis is only as good as the financial data it is based on. If a company's financial statements are inaccurate or manipulated in some way, the ratio analysis may lead to misleading conclusions. Issues like creative accounting, fraud, or different accounting standards can distort the picture.
2. Overlooking External Factors: Ratio analysis primarily focuses on internal operations of a company, but there are various external factors like market conditions, industry trends, and economic cycles that can significantly impact a company's performance. These factors might not be reflected directly in the financial ratios, thus potentially leading to an incomplete understanding of the company's overall situation.