What is the primary purpose of financial ratios in analysis?

The primary purpose of financial ratios in analysis is to assess and evaluate a company's performance. Financial ratios provide insights into various aspects of a business’s financial health, such as its profitability, liquidity, efficiency, and solvency. By analyzing these ratios, stakeholders—including investors, creditors, and management—can gain a clearer understanding of how well the company is doing in relation to its peers and its own historical performance.

For instance, profitability ratios can indicate how effectively a company is generating profits relative to its revenues or assets, while liquidity ratios assess its ability to meet short-term obligations. Ultimately, these evaluations help in making informed decisions related to investments, lending, and strategic planning.

Other options, while relevant to financial management, do not encompass the primary function of financial ratios as effectively as assessment and evaluation of performance. Calculating future cash needs and preparing tax returns involve specific financial calculations that don’t rely directly on ratio analysis, and creating budgets is primarily about forecasting and planning rather than evaluating past and current performance.