Certified Fraud Examiner Practice 2025 - Free Practice Questions and Study Guide

Ratio analysis is a tool used in financial evaluations to measure the relationship between different financial amounts, allowing analysts to examine the relative performance of various components within a company's financial statements. This method provides insights into various aspects of a business's financial health, such as liquidity, profitability, efficiency, and solvency.

By comparing ratios over time or against industry benchmarks, organizations can identify trends, assess operational effectiveness, and make informed decisions. For example, analyzing the current ratio can help ascertain a company's ability to meet its short-term obligations, while the debt-to-equity ratio offers insights into financial leverage and risk.

Other choices relate to specific areas that do not encompass the broader application of ratio analysis in evaluating financial relationships. For instance, identifying tax liabilities focuses on compliance and obligations rather than financial relationships, while calculating profit margins looks at a specific aspect of profitability rather than providing a holistic view through ratio comparisons. Additionally, assessing employee performance is a different area of evaluation, typically linked to human resources rather than financial metrics.