What is a financial ratio?

A financial ratio represents a quantitative relationship between two figures from financial statements, providing insight into a company's performance, financial health, and operational efficiency. This ratio allows analysts, investors, and management to make informed comparisons and assessments, such as profitability, liquidity, and solvency.

For instance, comparing total liabilities to total assets can indicate a company's leverage and overall risk. Ratios are fundamental in financial analysis because they translate raw data into meaningful metrics that facilitate decision-making.

In contrast, the other options do not encapsulate the complete definition or purpose of a financial ratio. A comparison between gross income and net income, while relevant, is too narrow and specific to represent the broader category of financial ratios. The suggestion that a financial ratio is a method to calculate total revenue ignores the comparative nature of ratios. Similarly, saying that a financial ratio is an average of all financial expenses misrepresents the concept, as ratios do not average figures but show relationships between selected data points.