What is the purpose of ratios in finance?

The purpose of ratios in finance is to assess relationships between financial statement items. Financial ratios provide valuable insights into a company's performance, financial health, and operational efficiency by comparing different line items from its financial statements. For example, ratios can reveal how well a company generates profits relative to its revenues or how efficiently it manages its assets to generate sales. These assessments enable stakeholders, such as investors, creditors, and management, to make informed decisions based on the comparative performance metrics that ratios provide.

This analytical tool is essential for evaluating trends over time, measuring a company's performance against industry standards, and identifying areas for improvement. It allows users to quickly grasp complex information and make comparative evaluations that guide investment and operational decisions.