What are financial ratios used for?

Financial ratios are used to compare financial statements issued by businesses to one another to evaluate how strong a prospect they are for investment or lending. Ratios like the current ratio indicate how likely a business is to be able to pay its liabilities with what it has on hand and is found by looking at the balance sheet of current assets and current liabilities. Another ratio might be to compare cash flow figures on cash flow statements to see how the businesses are bringing in vs. spending dollars on hand. A business may have red flags on its financials that only a ratio may highlight and can indicate to lenders and investors that they need to see higher interest rates or returns before placing their chips on this company.