What is the purpose of ratio analysis?

The purpose of ratio analysis is to express relationships among financial statement data. This analytical tool allows users to compare different elements of financial statements, such as assets, liabilities, revenues, and expenses, in a way that provides insight into a company's performance and financial health. By utilizing ratios, such as liquidity ratios, profitability ratios, and efficiency ratios, analysts can assess how well a company is managing its resources and how it stacks up against industry standards or competitors.

Ratio analysis facilitates a deeper understanding of trends over time and provides a clear, quantitative way to evaluate various aspects of a business's operating efficiency, financial stability, and profitability. This method enhances decision-making for investors, creditors, and management by translating complex financial data into more comprehensible metrics.

While simplifying financial statements can provide clearer insights, the primary goal of ratio analysis is to create a measurable comparison. Calculating tax obligations and evaluating managerial performance are also important but are not the fundamental purpose of ratio analysis itself. These activities may be informed by the insights gained from ratio analysis, but they do not encompass its main objective.