What are financial ratios used for?

Financial ratios are critical tools for assessing a company's performance and financial position. They provide quantitative measures that help stakeholders, including managers, investors, and creditors, understand how well the business is operating. These ratios can analyze various aspects of financial health, such as profitability, liquidity, efficiency, and solvency.

For example, profitability ratios like return on assets (ROA) and return on equity (ROE) inform stakeholders about how effectively a company is generating profit relative to its resources. Similarly, liquidity ratios such as the current ratio and quick ratio provide insights into a company's ability to meet short-term obligations, which is crucial for maintaining operational stability.

By using these ratios collectively, users can compare the company's performance over time or against industry benchmarks, making it easier to identify trends, areas for improvement, and potential issues. This comprehensive assessment supports strategic decision-making about investments, financing, and operational strategies.

The other options don't align with the fundamental purpose of financial ratios. For example, evaluating employee performance typically involves different metrics focused on productivity and effectiveness rather than financial data. Setting production schedules and determining marketing effectiveness also rely on operational and strategic analysis rather than financial ratio analysis.