Certified Financial Management Specialist Practice Exam

What is the primary purpose of using ratio analysis in finance?

1. To measure stock market performance

2. To evaluate financial statement comparisons

3. To establish revenue projections

4. To determine tax liabilities

The correct answer is: To evaluate financial statement comparisons

The primary purpose of using ratio analysis in finance is to evaluate financial statement comparisons. Ratio analysis involves calculating various financial ratios that provide insight into a company's financial performance and health by comparing line items from financial statements like the balance sheet and income statement. This analysis helps stakeholders, including investors and management, assess aspects such as profitability, liquidity, efficiency, and solvency. By comparing these ratios over time or against industry benchmarks, analysts can identify trends, discern strengths and weaknesses, and make informed decisions regarding operational improvement or investment strategies. Each ratio serves as a tool for deeper analysis, allowing for clearer comparisons regardless of the company's size or the nature of its operations. Other options, while related to financial considerations, do not capture the essence of what ratio analysis is fundamentally about. For example, measuring stock market performance focuses more on fluctuations in share prices rather than internal company assessments. Establishing revenue projections involves forecasting future sales rather than analyzing past performance. Determining tax liabilities is a process focused on compliance and obligations rather than assessing financial health through comparative metrics.