What is a primary use of financial ratios?

The primary use of financial ratios is to generate multiples for company comparison. Financial ratios serve as standardized metrics that allow investors and analysts to compare the financial health and performance of different companies, regardless of their size or industry. By using ratios such as the price-to-earnings ratio or the return on equity, stakeholders can evaluate how effectively a company is performing in context to its peers within the same sector.

This comparative analysis is crucial for making informed investment decisions, assessing company performance over time, and identifying trends in operational efficiency and profitability. Ratios facilitate a deeper understanding of a company’s fiscal practices as they contextualize raw financial data into meaningful insights that can be consistently measured against industry benchmarks.