Final answer:
Financial ratio analysis is a tool used to evaluate relationships among different financial statement items to help understand a company's financial and operating performance.
Step-by-step explanation:
Financial ratio analysis is a tool used to evaluate relationships among different financial statement items to help understand a company's financial and operating performance. It involves calculating various ratios, such as profitability ratios (e.g., return on equity, gross profit margin) and liquidity ratios (e.g., current ratio, quick ratio) to assess a company's financial health. By analyzing these ratios, decision makers can gain insights into the company's profitability, efficiency, solvency, and overall performance.
For example, a high return on equity ratio indicates that a company is generating substantial profits relative to its shareholders' investment, while a low current ratio may suggest that a company is facing liquidity challenges.