What is the main purpose of financial ratios in financial analysis?

The main purpose of financial ratios in financial analysis is to evaluate performance and financial health. Financial ratios provide valuable insights into a company's operational efficiency, profitability, liquidity, and leverage. By analyzing these ratios, financial advisors and stakeholders can assess how well a company is performing relative to industry standards, identify areas for improvement, and make informed decisions regarding investments or operational changes.

For instance, profitability ratios such as return on equity or return on assets can indicate how effectively a company is generating profit relative to its resources. Liquidity ratios, such as the current ratio, help to determine a company’s ability to meet short-term obligations, while debt ratios assess the level of financial leverage and the risk of insolvency.

While other options might touch on aspects of financial analysis, they do not encompass the comprehensive role that financial ratios play in assessing a firm's overall financial situation and strategic standing. Evaluating performance and financial health is essential for investors, creditors, and management to understand the viability and long-term sustainability of an organization.