What is the starting point for calculating financial ratios?

The starting point for calculating financial ratios is closely tied to historical performance metrics, making past ratios a fundamental basis for evaluating a company's financial health and performance. Historical data provides a context that allows analysts to see trends over time, helping to form comparisons with both past performance and industry standards.

Using historical ratios offers insight into how a company's financial position has changed relative to its own past, as well as its relative performance against peers. By establishing a baseline from past ratios, analysts can more accurately assess whether a company's financial situation is improving, deteriorating, or remaining stable. This foundation is crucial for forming a predictive outlook moving forward or making strategic financial decisions.

Other potential options, such as relying solely on industry benchmarks, forecasted earnings, or current market conditions, typically serve as supplementary inputs. While they are valuable for context and comparison, they do not provide the same foundational insight that past ratios offer when calculating financial ratios.