What are ratios used for in financial reporting?

Ratios play a crucial role in analyzing and interpreting financial reports. They allow users, such as investors, creditors, and management, to assess the financial health, performance, and stability of a business. By comparing different financial items from the financial statements, ratios can highlight trends, identify strengths and weaknesses, and provide insights into various aspects of a company's operations.

For example, liquidity ratios can show a company's ability to meet short-term obligations, while profitability ratios can indicate how well a company generates profit relative to its revenue or assets. This analytical approach enables stakeholders to make informed decisions based on a deeper understanding of the company's financial situation rather than just looking at the raw figures.

The other options do have significance in business, but they don't capture the primary purpose of ratios in the context of financial reporting. Preparing detailed budgets typically involves forecasting and planning rather than analyzing past performance. Minimizing tax liabilities is a strategy for tax efficiency rather than a function of financial reporting. Calculating revenue growth is essential, but it is just one aspect of understanding a company's overall financial performance, which ratios encompass in a broader sense.