Which statement accurately describes the relationship between ratio analysis and projections?

Ratio analysis provides information for making future estimates and projections

Ratio analysis involves the examination and interpretation of various financial ratios derived from a company's financial statements. These ratios provide insights into different aspects of a company's financial performance, such as profitability, liquidity, solvency, and efficiency. While ratio analysis itself doesn't directly create accurate financial projections, it provides valuable information that can aid in making informed estimates and projections for the future. Financial analysts and decision-makers use the trends and patterns revealed through ratio analysis to make predictions about a company's future performance. For example, if a company's current profitability ratios show a consistent upward trend, it might suggest that the company's profitability is likely to improve in the future as well. Similarly, if liquidity ratios indicate a decline, it might prompt managers to take action to improve liquidity in the coming periods. However, it's important to note that while ratio analysis provides valuable insights, it is only one part of the process of creating financial projections. Projections also take into consideration external factors, market trends, economic conditions, management decisions, and other variables that can impact a company's future performance. Therefore, while ratio analysis informs the decision-making process, it's not the sole determinant of future projections.