What are financial ratios used for?

Financial ratios serve as important tools for assessing a company's performance and financial health. They provide insights into various aspects of a business's operations, allowing stakeholders to evaluate profitability, liquidity, efficiency, and solvency. By analyzing these ratios, investors, managers, and analysts can make informed decisions regarding investments, management strategies, and operational improvements.

For example, common financial ratios like the current ratio and quick ratio help assess liquidity, while return on equity (ROE) and profit margin can indicate how effectively a company is generating profits relative to its resources. Through these evaluations, one can gain a clearer picture of how well a company is positioned financially, which is crucial for strategic planning and investment decisions.