In financial statement analysis, ratio analysis is primarily useful for which of the following purposes in relation to a company?

Introduction / Context:
Ratio analysis is a widely used technique in accounting and finance for interpreting financial statements. By calculating relationships between key figures in the income statement and balance sheet, analysts can assess liquidity, profitability, solvency and efficiency. Examinations often test whether you understand that the main purpose of ratio analysis is evaluation and diagnosis, not direct improvement of profits or sales. Recognising this helps you correctly place ratio analysis within the broader process of financial decision making.

Given Data / Assumptions:

• The question asks about the primary usefulness of ratio analysis.
• Options mention evaluating financial performance, improving profits, evaluating sales and none of the above.
• We assume standard financial ratios such as current ratio, debt equity ratio, gross profit ratio and return on equity.
• The focus is on what ratio analysis allows managers, investors and creditors to do.

Concept / Approach:
Ratio analysis converts raw accounting numbers into meaningful indicators. For example, liquidity ratios show the firm's ability to meet short term obligations, profitability ratios indicate how efficiently it generates profit from sales or assets, and leverage ratios reveal financial risk. These ratios help users evaluate the overall financial health and performance of the company over time and in comparison with peers. However, ratios themselves do not directly change profits; they provide information that management can use when planning improvements.

Step-by-Step Solution:
Step 1: Examine option a, which says that ratio analysis is used to "Evaluate financial performance of a company". This aligns well with the analytical and diagnostic nature of ratios.Step 2: Option b states that ratio analysis is used "To improve profits of a company". While ratio analysis can inform strategies to improve profits, the direct improvement comes from actions taken, not from the calculation of ratios itself.Step 3: Option c mentions "Evaluate sales", which is too narrow. Ratio analysis evaluates many aspects, not only sales volumes.Step 4: Option d, "None of the above", cannot be correct because option a already describes a standard textbook purpose.Step 5: Therefore, the most accurate statement is that ratio analysis is used to evaluate financial performance.

Verification / Alternative check:
If you recall typical uses of ratio analysis, such as comparing profitability year over year or benchmarking a company against industry averages, they are all evaluative. Credit rating agencies, banks and investors compute ratios to judge whether a company is financially sound. Management teams also track ratios to monitor performance and identify problem areas. This repeated emphasis on assessment and comparison confirms that evaluation of financial performance is the primary function of ratio analysis.

Why Other Options Are Wrong:
Option b is misleading because simply calculating ratios does not improve profits. Improvement requires strategic decisions such as cost control, pricing changes or investment in productivity. Ratio analysis only provides information to support those decisions. Option c limits the scope to sales, whereas ratios also cover debt, liquidity, efficiency and returns. Option d is incorrect because there is clearly a well established purpose captured by option a. Therefore these alternatives do not correctly describe the main role of ratio analysis.

Common Pitfalls:
Students sometimes attribute too much power to ratio analysis, thinking it can solve financial problems by itself. Ratios are tools, not solutions. Another pitfall is to focus only on a few ratios, such as gross profit margin, and ignore the broader picture of solvency and liquidity. This can lead to incomplete or biased evaluations. To avoid such errors, remember that ratio analysis is an interpretive framework for financial statements, whose primary goal is to evaluate performance and position so that better decisions can be made.

Final Answer:
Ratio analysis is primarily useful to evaluate the financial performance of a company by interpreting relationships among key figures in its financial statements.