What is one purpose of ratio analysis in finance?

One purpose of ratio analysis in finance is to allow for better comparison both over time and between different companies. Ratios provide a standardized method for evaluating financial data, which facilitates assessments of performance, efficiency, and profitability across different periods and entities. By using ratios, analysts can identify trends in a company's performance over time, which is essential for making informed financial decisions.

Ratio analysis also enables comparisons between companies within the same industry, irrespective of their size. This means investors and analysts can gauge how a specific company performs relative to its competitors, which can inform investment choices and strategic planning. The use of ratios like return on equity, current ratio, and debt-to-equity ratio helps in understanding financial health and operational effectiveness.

While historical financial statements, market trends, and the impact of human resources are important aspects of financial analysis, they do not specifically encapsulate the primary function of ratio analysis, which is centered on comparative assessment.