"The purpose of financial statement analysis is to reveal financial strengths and weaknesses of the firm,"…

The statement is correct. Financial statement analysis is the critical examination of the relationship between the various elements of the financial statements, and since ratios reveal the financial strengths and weaknesses of a firm on a particular date — which in turn supports various financial decisions — revealing those strengths and weaknesses is indeed its central purpose, as the following discussion shows :

Raw statements do not reveal anything by themselves: financial statements are only a summarized presentation of data prepared according to accounting principles; the information in them is neither meaningful nor useful until it is analysed, so the analysis is what turns the figures into a statement of strength or weakness.

It simplifies and systematizes the figures: a figure standing alone may mean nothing — relating it to another figure gives it meaning. Ratio analysis simplifies, summarizes and systematizes accounting figures and makes them understandable even to an average user, through ratios, trend percentages, graphs and diagrams.

Liquidity ratios reveal short-term strength or weakness: the current ratio (standard 2:1) and the quick ratio (standard 1:1) measure whether the firm can meet its short-term obligations on time — a ratio below the standard signals inadequate current assets, while a very high current ratio is not strength either, since it means less efficient use of funds.

Capital structure ratios reveal long-term solvency: the debt-equity ratio, debt to total capital ratio, interest coverage ratio and fixed charge coverage ratio show whether the firm is financially sound for its long-term obligations and whether it can pay interest regularly and repay principal on the due date — a high interest coverage being a clear strength.

Turnover ratios reveal operating efficiency: inventory turnover, receivable turnover, average collection period, and fixed and total assets turnover describe the relationship between the firm's level of activity and the assets employed to generate it — a low inventory turnover exposing stock sitting unsold in the warehouse, and a long collection period exposing slow recovery from debtors.

Profitability ratios reveal earning strength: gross profit margin, net profit margin, operating ratio, return on equity, return on assets and return on capital employed show whether the firm earns enough on each rupee of sales and on each rupee of resources employed — a low net profit margin indicating poor financial planning and low efficiency.

It locates weaknesses hidden behind good overall performance: a business may have several weaknesses even when its overall performance looks efficient; ratios locate them precisely so that management can take remedial measures — which is exactly the "revealing" the statement speaks of.

It supports comparison, which is how strength is judged: comparative statements, common size statements and trend analysis allow inter-period and inter-firm comparison, and strength or weakness only becomes visible against a standard, a past period or a competitor.

It serves the wider purposes that flow from this: because it reveals strengths and weaknesses, the analysis also serves planning and decision making, evaluation of performance, diagnosis of managerial and operating problems, credit decisions by bankers, tax calculation, government policy formulation, control within the organization, and research.

But the statement must be qualified: analysis only diagnoses — it cannot cure, since it identifies problems but cannot itself suggest the solutions. It also ignores qualitative aspects, rests on historical information that is not adjusted for price level changes, is not free from the analyst's bias, and may mislead if the firms compared have followed different accounting principles.

Hence the statement is justified — revealing financial strengths and weaknesses is the very purpose for which financial statement analysis exists — but it is a diagnosis, not a remedy, and its conclusions are only as sound as the data and the judgment behind them.