What is the primary purpose of financial ratios?

The primary purpose of financial ratios is to analyze performance and financial health. Financial ratios are tools that allow businesses, investors, and analysts to evaluate various aspects of a company's financial situation, such as liquidity, profitability, efficiency, and solvency. By comparing these ratios to previous periods, industry benchmarks, or competitors, stakeholders can gain insights into how well a business is performing and make informed decisions regarding investments, resource allocation, and strategic direction.

While determining employee salaries, projecting future sales, and assessing customer satisfaction are all important aspects of running a business, they do not directly relate to the evaluation of a company's financial condition as effectively as financial ratios do. Ratios provide a quantitative basis for assessing a company's financial practices and outcomes, which is essential for sustainable management and growth.