What are financial ratios used for?

Financial ratios serve a crucial function in analyzing a company's financial health and operational effectiveness. By using various ratios, stakeholders such as investors, creditors, and management can assess the efficiency and profitability of a business, as well as its liquidity, solvency, and overall financial stability.

These ratios break down complex financial statements into understandable figures that allow for comparison over time or between companies within the same industry. For instance, profitability ratios indicate how well a company generates profits in relation to its sales or equity, while liquidity ratios assess the entity's ability to meet its short-term obligations.

In contrast, options that involve tax codes, compliance, or employee performance do not directly relate to the primary function of financial ratios, which is to analyze financial data to guide business decisions. Thus, while those aspects are important in their own right, they do not encapsulate the primary purpose of financial ratios.