What are “financial ratios” used for in wealth management?

Financial ratios are critical tools in wealth management, primarily used to evaluate a company’s performance and financial health. They provide a quantitative analysis of financial statements, allowing advisors to assess aspects such as profitability, liquidity, solvency, and operational efficiency. By analyzing these ratios, wealth managers can gain insights into a company's overall stability and sustainability, which is vital when making investment decisions or advising clients on stock purchases or corporate bonds.

Utilizing financial ratios helps in comparing companies within the same industry, benchmarking performance against competitors, and identifying trends over time. This can enable wealth managers to make informed decisions that align with their clients' financial goals, strategic investments, and risk appetites.

In contrast, while creating a budget plan for individual clients, assessing workforce efficiency, and determining the liquidity of real estate investments are all essential aspects of wealth management, they do not directly relate to the primary function of financial ratios. Budgeting focuses on personal finances, workforce assessments are involved in operational management, and liquidity analysis pertains specifically to asset management, especially in real estate deals, rather than broader corporate performance.