What is the primary purpose of ratio analysis in financial markets?

The primary purpose of ratio analysis in financial markets is to provide insights that help investors understand the performance and financial health of different companies relative to one another. This process allows analysts to evaluate and compare various financial metrics—like profitability, liquidity, and solvency—across firms within the same industry or market segment. By doing so, investors can make informed decisions on where to allocate resources or which securities to purchase or sell based on relative performance.

While predicting future prices of securities, evaluating a single asset’s performance, and analyzing market sentiment may all be aspects of a broader financial analysis, they do not fully encapsulate the core intention behind ratio analysis. The main focus is on comparative evaluation, making it a vital tool for assessing relative value in the financial markets.