How can financial ratios be used in risk assessment?

Financial ratios are vital tools in risk assessment because they aggregate various financial metrics into easily interpretable figures, offering a clear view of an organization's financial health and identifying potential risks. By evaluating ratios like liquidity, profitability, solvency, and efficiency, stakeholders can discern trends and pinpoint areas that may indicate financial distress. For instance, a declining current ratio could suggest liquidity issues, while a rising debt-to-equity ratio may highlight increasing financial risk due to excessive leverage.

The use of financial ratios allows organizations to benchmark themselves against industry standards, enhancing the ability to detect early warning signs of financial trouble before they escalate. This proactive approach can help in decision-making, compliance, and strategies aimed at mitigating identified risks, thereby safeguarding the organization’s financial stability.

The other options presented do not align with the specific role that financial ratios play in risk assessment. Marketing strategies and employee performance reviews involve qualitative analyses and metrics that are distinct from financial ratio assessments, while guarantees of profitability are generally unrealistic in finance since all investments carry inherent risks.