What are financial ratios used for?

Financial ratios are vital tools utilized to assess a company's performance and financial health. They provide a quantitative basis for comparing the financial position and performance of companies over time or against industry peers. Financial ratios help stakeholders, such as investors, analysts, and management, understand various aspects of a company, such as profitability, liquidity, efficiency, and solvency.

For instance, ratios like return on equity (ROE), current ratio, or debt-to-equity ratio can reveal insights into how well a company is generating returns for its shareholders, its ability to meet short-term obligations, and its financial leverage. By interpreting these ratios, stakeholders can make informed decisions regarding investments, lending, or operational strategies, which is why assessing financial health is a fundamental purpose of using financial ratios.