Which of the following best describes ratio analysis?

Ratio analysis is a technique for evaluating financial data, making it an essential tool in the field of finance and accounting. It involves calculating and analyzing significant relationships between different financial statement items, such as assets, liabilities, revenues, and expenses. By using ratios, stakeholders can interpret financial performance, assess liquidity, profitability, and solvency, and make informed decisions regarding resource allocation and investment.

This method helps to simplify complex financial information into actionable insights, allowing managers and investors to understand the financial health of a business more clearly. For instance, common ratios like the current ratio or return on equity can reveal how well a company is managing its resources and generating returns for its shareholders. In summary, ratio analysis plays a crucial role in financial evaluation, providing a framework for comparing financial performance over time or against industry benchmarks.