What is the purpose of financial ratios?

Financial ratios serve a critical purpose in assessing a company's performance and financial condition. They provide a quantitative analysis that can help stakeholders, including investors, creditors, and management, understand the financial health of a business. By analyzing these ratios, one can evaluate various aspects such as profitability, liquidity, efficiency, and solvency.

For instance, ratios like the current ratio and quick ratio help assess liquidity, while profit margin and return on equity provide insights into profitability. These evaluations enable stakeholders to make informed decisions regarding investments, financing, and operational strategies.

The other options highlight specific aspects that financial ratios do not primarily address. Predicting stock market fluctuations involves broader market analysis that includes economic indicators and market sentiment rather than just financial ratios. Historical trends in sales are important, but they are not the overall purpose of financial ratios; these trends can be better analyzed through other means, such as trend analysis or sales forecasting. Employee compensation is typically determined by a company's policy and market conditions, again not reflecting the role or purpose of financial ratios. Therefore, the primary significance of financial ratios lies in their ability to evaluate a company's overall performance and condition comprehensively.