What are financial ratios primarily used for?

Financial ratios are primarily utilized to evaluate a company's performance and financial health. These ratios provide critical insights into various aspects of a business's financial standing by comparing line item data from financial statements. For instance, liquidity ratios assess a company's ability to meet short-term obligations, while profitability ratios measure overall profitability and operational efficiency. Solvency ratios look at long-term viability by analyzing debt levels in relation to assets and equity.

Using these ratios, stakeholders, including investors, creditors, and management, can make informed decisions regarding investments, loan approvals, operational changes, and strategic planning. By providing a benchmark for performance over time or in comparison to industry standards, financial ratios serve as vital tools in understanding a firm’s economic position and operational success.