How do ratios assist in assessing business performance?

Ratios play a crucial role in assessing business performance by simplifying the interpretation of financial statements. Financial statements can often be complex, filled with varying figures that need to be analyzed to understand a company's overall health. Ratios distill these figures into meaningful comparisons that are easy to understand, making it easier for stakeholders—such as managers, investors, and analysts—to gauge the company's performance quickly.

For example, common ratios like the current ratio, debt-to-equity ratio, and return on equity provide insights into liquidity, financial leverage, and profitability, respectively. These ratios can be used to benchmark a company against its past performance or against competitors within the industry, enhancing the ability to make informed decisions based on financial data.

The other options don't serve the same purpose. Narratives may provide context but do not clarify data as effectively as ratios. While ratios can offer insights into potential growth, they do not predict it with accuracy. Furthermore, ratios derive from historical data rather than considering real-time market conditions directly, limiting their ability to address current market trends.