Certified Management Accountant Practice Exam 2026 - Free CMA Practice Questions and Study Guide

Analyzing ratios in financial statements serves the critical purpose of assessing the financial health of a firm. Ratios provide insights into various aspects of a company's performance, including its liquidity, profitability, efficiency, and solvency.

For example, liquidity ratios, such as the current ratio, help determine a company's ability to meet its short-term obligations. Profitability ratios, like the return on equity, indicate how well the company is generating profit relative to shareholders' equity. Efficiency ratios, such as inventory turnover, measure how effectively a company utilizes its resources. Finally, solvency ratios help evaluate a company's long-term viability and capacity to cover debts.

By examining these ratios, stakeholders—including management, investors, and creditors—can gain a deeper understanding of the company's strengths and weaknesses. This assessment is crucial for making informed decisions regarding investments, credit, and operational strategies, ultimately guiding the firm toward financial stability and growth.