What is a common use of ratio analysis in finance?

Ratio analysis is commonly used to assess financial stability by analyzing a company's financial statements. It enables stakeholders to evaluate various aspects of financial health, such as liquidity, profitability, and solvency, through various ratios like the current ratio, debt-to-equity ratio, and return on equity.

Understanding these ratios helps in identifying how well the company can meet its short-term obligations, manage its debt levels, and generate returns relative to shareholder equity. This comprehensive assessment allows investors, creditors, and management to make informed decisions regarding the company's financial strategies and risk levels.

While predicting future sales, determining production efficiency, and evaluating marketing effectiveness are important aspects of business analysis, they do not primarily involve the use of ratio analysis. These areas often rely on forecasting methods, operational metrics, and market research rather than the quantifiable financial relationships that ratio analysis provides.