What is a financial ratio?

A financial ratio is defined as a quantitative relationship between two financial statement accounts. It serves as a tool to assess various aspects of a company's financial health and performance. Financial ratios help investors, analysts, and management to analyze the efficiency, profitability, liquidity, and solvency of a company by comparing different line items within the company's financial statements such as the balance sheet and income statement.

For example, the current ratio, which compares current assets to current liabilities, helps assess short-term liquidity. Similarly, the debt-to-equity ratio compares total liabilities to shareholders' equity, indicating financial leverage and risk levels of the company. The use of these ratios enables stakeholders to draw conclusions about operational performance and make informed decisions.

The other choices do not accurately capture the essence of financial ratios. While tax liabilities and market share metrics are important for business analysis, they do not represent the comparative nature of financial ratios. Additionally, total cash receipts over a period reflect cash flow rather than a relationship between different financial statement elements, therefore, not fitting the definition of a financial ratio.