What is ratio analysis?

Ratio analysis is fundamentally the evaluation of various financial ratios that emerge from a company's financial statements, such as the balance sheet or income statement, to assess its performance and financial health. By examining these ratios, investors and analysts can gain insights into aspects such as profitability, liquidity, efficiency, and solvency. Commonly used ratios include the price-to-earnings ratio, current ratio, and return on equity, among others.

This form of analysis supports decision-making for investment by allowing stakeholders to compare a company's performance over time or against industry benchmarks. Understanding these ratios provides a clearer picture of how effectively a company is managed and how well it may perform in the future, which is critical for making informed investment choices.