Question

What is the purpose of Financial Ratios?

Answer 1

Using financial ratios provides all the market participants a way to evaluate a company’s. The ratios can be used on a standalone basis or on a comparison basis.

Example: Debt/ Equity ratio = Total liabilities/ Total shareholder’s equity.

Using this ratio, we can measure how much debt a business has compared to the amount of money invested by its shareholders. This ratio can also be used as an industry benchmark and various firms can be compared accordingly.