What is the main purpose of financial ratios?

The primary purpose of financial ratios is to assess a company’s performance and financial position. These ratios provide valuable insights into various aspects of a company's financial health, including profitability, liquidity, efficiency, and solvency. By analyzing these ratios, stakeholders such as investors, creditors, and management can gauge how well a company is performing relative to its goals and compare it to industry benchmarks or competitors.

Financial ratios help in making informed decisions about investments and resource allocation by highlighting strengths and weaknesses. For example, ratios like return on equity or current ratio can indicate how effectively a company is using its assets to generate profits or how well it can meet its short-term obligations. This analytical approach is essential for understanding not just the current financial status of a company, but also forecasting future performance and informing strategic planning.

Other options, while they pertain to business operations, do not directly relate to the primary function of financial ratios. Increasing sales and revenue typically falls under business strategies and marketing efforts rather than the direct purpose of financial analysis. Determining employee retention rates and calculating tax obligations pertain more to human resources management and tax reporting respectively, neither of which are primary focuses of financial ratio analysis.