What is the purpose of financial ratios?

The purpose of financial ratios primarily revolves around assessing a company's financial performance and position. Financial ratios are essential tools for analyzing various aspects of a company’s financial health, such as profitability, liquidity, efficiency, and solvency. They allow stakeholders, including investors, creditors, and management, to gauge how well a company is performing relative to its peers and its own historical performance.

By calculating ratios such as return on equity, current ratio, or debt-to-equity ratio, users can derive insights into a company's ability to generate profit, cover its short and long-term obligations, and effectively utilize its assets. This comprehensive analysis helps in making informed strategic decisions regarding investments, creditworthiness, and operational adjustments.

While predicting market trends and establishing corporate governance may involve financial data, these activities are not the primary functions of financial ratios. Similarly, tax reporting may require financial information, but it does not specifically utilize ratios for assessing a company's overall financial health and performance. Thus, the assessment of a company's financial performance and position distinctly captures the essential role that financial ratios play in business finance.