What financial analysis technique is used to assess the relationship between different financial metrics?

Ratio analysis is a financial analysis technique that focuses on evaluating the relationships between various financial metrics, usually derived from a company's financial statements. This technique enables investors and analysts to assess a company’s performance, efficiency, liquidity, and profitability by comparing different financial figures, such as earnings to sales or debt to equity.

For example, by calculating the current ratio (current assets divided by current liabilities), a firm can gauge its short-term liquidity position. Similarly, the price-to-earnings ratio (P/E) helps assess the valuation of a company’s stock relative to its earnings.

This analytical approach is crucial for benchmarking a company's performance against industry standards or competitors, thereby providing insights that can inform investment decisions, operational improvements, or financial strategies. The focus on relationships between metrics is what sets ratio analysis apart from other techniques, which may look at data in isolation or consider only historical performance or variance from a budget.