What are financial ratios used for?

Financial ratios are crucial tools for evaluating a company's performance. They provide a framework for comparison, enabling stakeholders to assess a company's financial health relative to industry benchmarks or peers. By analyzing these ratios, such as profitability, liquidity, and solvency ratios, investors and management can identify strengths and weaknesses in financial performance.

Using ratios for analysis helps in understanding how well a company is performing in relation to its competitors and the industry standards. This comparative analysis is essential for making informed decisions regarding investments, operational changes, and strategic planning.

While the other options present legitimate business activities, they do not capture the primary purpose of financial ratios. Increasing market share, calculating tax obligations, and determining management compensation are important considerations but are not the fundamental function of financial ratios. Ratios specifically focus on performance assessment and financial analysis, which is why the choice highlighting their evaluative purpose is the most accurate.