What is the primary purpose of ratio analysis?

The primary purpose of ratio analysis is to compare financial figures for performance evaluation. This analytical technique allows stakeholders, such as investors, analysts, and management, to assess a company's financial health and operational efficiency by examining relationships between various financial statement items. By calculating ratios, one can identify trends over time, evaluate performance against benchmarks or industry standards, and make informed decisions about the company's future prospects.

For instance, common ratios such as liquidity ratios, profitability ratios, and leverage ratios enable the comparison of a company's performance relative to its past performance or to that of other companies within the same sector. This comparative evaluation helps in understanding how well a company is performing and can reveal areas that need improvement or that are performing well.

In contrast, forecasting future market trends, determining market capitalization, and calculating the intrinsic value of stocks involve different methodologies and are not the main objectives of ratio analysis. Ratio analysis provides a snapshot of current performance, while market trend analysis and intrinsic value calculations take broader external factors and future expectations into account.