What is a financial ratio?

A financial ratio is a metric used to evaluate a company's financial performance by comparing two relevant financial figures from its financial statements. These ratios provide insights into various aspects of a company's operations, including its profitability, liquidity, efficiency, and solvency. By analyzing these ratios, investors, analysts, and management can make informed decisions regarding the company’s financial health and operational effectiveness.

For instance, common financial ratios include the current ratio, which assesses liquidity, and the return on equity, which evaluates profitability. These ratios help stakeholders understand how well the company is performing relative to its economic goals and industry peers. The other options, while related to business performance in some contexts, do not specifically define what a financial ratio is.