What is the main purpose of financial ratio analysis?

Financial ratio analysis is primarily focused on evaluating the financial performance and stability of a business by comparing various figures from its financial statements. This analysis involves calculating specific ratios that provide insight into a company’s profitability, efficiency, liquidity, and solvency. By examining these ratios over time or in relation to industry benchmarks, stakeholders such as management, investors, and creditors can assess how well the business is performing and identify areas that may need improvement.

For instance, liquidity ratios help determine if a business can cover its short-term obligations, while profitability ratios assess how effectively a company is generating profits relative to its revenue or equity. This comprehensive view aids in making informed decisions regarding investment, lending, or operational adjustments.

The other choices do not accurately reflect the purpose of financial ratio analysis. Predicting employee performance and wages, ensuring minimal taxes, and comparing products and services pertain to different aspects of business management and strategy rather than the core financial health assessment that ratio analysis provides.