What is the primary purpose of financial ratio analysis?

The primary purpose of financial ratio analysis is to assess a company's performance and financial health. Financial ratios provide a quantitative measure that helps analysts, investors, and stakeholders understand various aspects of a company's operations, including its profitability, efficiency, liquidity, and solvency. By comparing these ratios over time or against industry benchmarks, one can gauge how well a company is doing in terms of managing its resources, generating earnings, and maintaining financial stability.

Ratios can yield insights into how effectively the company is utilizing its assets, how it handles its liabilities, and how it is positioned to meet its short-term and long-term financial obligations. This analysis is essential for making informed investment decisions, conducting credit assessments, and performing comprehensive financial evaluations. Through financial ratio analysis, stakeholders can identify trends, discover strengths and weaknesses, and form a clear perspective on the company’s overall health.