What is the primary purpose of ratio analysis in investing?

The primary purpose of ratio analysis in investing is to compare the performance of two securities. This analytical method allows investors to evaluate the financial health and performance metrics of companies relative to one another. By utilizing ratios such as price-to-earnings (P/E), return on equity (ROE), and debt-to-equity, investors can gain insights into how a company stacks up against its peers, make more informed investment decisions, and identify potential overvalued or undervalued stocks.

While other options touch on important aspects of investing, they do not encapsulate the core intent of ratio analysis. Overall market trends are typically assessed through broader market indicators rather than individual financial ratios. Identifying the best-performing sectors involves a macro-level view rather than the comparative analysis that ratios provide. Predicting future price movements relies on various forecasting methods, which may include but are not limited to ratio analysis.