What is a financial ratio analysis?

Financial ratio analysis involves evaluating a company's financial statements, such as the balance sheet and income statement, to assess its performance and financial health. By using various ratios, stakeholders can gain insights into profitability, liquidity, efficiency, and solvency. These ratios can highlight trends over time, allowing for comparisons against industry benchmarks or competitors.

This analysis is crucial for investors and creditors as it helps them make informed decisions regarding investing in or lending to the company. The ratios derived from financial statements, such as the current ratio (liquidity), return on equity (profitability), and debt-to-equity ratio (solvency), serve as vital indicators of the company's operational efficacy.

This choice is distinctly aligned with the core purpose of financial ratios, which is to provide a quantitative basis for assessing financial performance, thereby making it the correct answer. The other options pertain to different aspects of business analysis, such as customer satisfaction or marketing effectiveness, which are important but not specific to financial ratio analysis.