Table of Contents
Introduction
Financial ratios help you understand how well a company is doing. Instead of digging through long financial statements, you can use ratios to check how much profit a business is making, whether it can pay its bills, or how well it uses its assets.
If you’re a business owner, manager, or investor, knowing how to read these ratios can help you make better decisions. They’re also a key part of fin analysis — the process of studying a business’s financial data to find risks and opportunities.
What Is Ratio Analysis?
Ratio analysis means comparing numbers from a company’s financial statements — like revenue, cost, assets, or debt — to understand how it’s doing. These comparisons help track trends and highlight strengths or red flags.
If your weekly management report includes financial ratios, it turns your financial data into quick, clear takeaways. For example, you can see if sales are growing faster than costs or if debt levels are getting too high.
Are you confident your business tax filings are fully optimized and compliant?
The Main Types of Financial Ratios
Profitability Ratios
These show whether the company is making enough money.
| Ratio | Formula | Use |
| Return on Equity (ROE) | Net Income ÷ Shareholder’s Equity | Tells you how well the company uses investors’ money to make a profit. |
| Return on Assets (ROA) | Net Income ÷ Total Assets | Shows how good the company is at using its assets to earn money. |
| Gross Margin | (Revenue – Cost of Goods Sold) ÷ Revenue | Reveals how much profit is left after covering production costs. |
ROE and ROA are key tools for measuring a business’s return on investment. If both are growing, it’s usually a good sign.
Efficiency Ratios
Efficiency ratios show how well a company runs its day-to-day operations.
| Ratio | Formula | Why It Matters |
| Inventory Turnover | Cost of Goods Sold ÷ Average Inventory | A higher number means inventory is selling quickly. |
| Accounts Receivable Turnover | Net Credit Sales ÷ Average Accounts Receivable | Shows how fast a company collects money from customers. |
Efficient companies waste less and generate more with what they already have. These ratios also affect operating expenses and cash flow.
Liquidity Ratios
These help you check whether a business can cover its short-term debts.
| Ratio | Formula | What It Shows |
| Current Ratio | Current Assets ÷ Current Liabilities | If it’s over 1, the company likely has enough to pay its bills. |
| Quick Ratio | (Cash + Accounts Receivable + Marketable Securities) ÷ Current Liabilities | A stricter version of current ratio. Excludes inventory. |
If these are too low, the company may struggle to pay employees or suppliers on time.
Leverage Ratios
Leverage ratios show how much of the business is funded by debt.
| Ratio | Formula | Risk Level |
| Debt-to-Equity | Total Liabilities ÷ Shareholder’s Equity | A high ratio means more risk. |
| Interest Coverage | EBIT ÷ Interest Expense | Lower values suggest trouble in paying interest. |
High debt might lead to bigger profits, but it also increases financial risk.
How to Use Ratios in a Weekly Management Report
A strong weekly management report should include financial ratios with quick notes that explain what they mean.
Example:
“This week’s ROE increased from 10% to 13%, signaling better use of shareholder funds.”
Visual Tip:
Use a small dashboard or table with color coding:
- Green: improving
- Yellow: stable
- Red: needs attention
This approach makes your report easy to read, even for non-finance team members.
Key Ratio Formulas Explained
Here are some essential ratios — all calculated by dividing two key numbers:
| Ratio | Formula | Use |
| Return on Equity (ROE) | Net Income ÷ Equity | Measures profit made from owners’ investments. |
| Return on Assets (ROA) | Net Income ÷ Total Assets | Tracks how well the company uses assets to earn profit. |
| Inventory Turnover | Cost of Goods Sold ÷ Avg. Inventory | Shows how quickly stock is sold. |
| Current Ratio | Current Assets ÷ Liabilities | Indicates ability to pay short-term bills. |
| ROI | Net Profit ÷ Cost of Investment | Helps evaluate new purchases or projects. |
How to Evaluate a Company Using Ratios
Here’s a simple process:
- Compare Against Industry Averages
Is the business performing better than others in its field? - Check Year-over-Year Trends
Are ratios improving? Or are there signs of trouble? - Balance Profit and Risk
High return on equity (ROE) is great — but not if it comes from excessive borrowing. - Keep an Eye on Efficiency
If inventory turnover is slowing down, the company might be overstocked or losing sales.
These ratios help you assess a company from all angles — not just its sales numbers.
Limitations of Financial Ratios
Ratios are helpful, but not perfect.
- They only show past performances.
- One-time events can skew results.
- Accounting methods can differ between companies.
- They don’t always show the full story.
That’s why fin analysis should include ratios, but also context. Don’t skip the full financial statements or footnotes.
Final Thoughts
Financial ratios are simple, powerful tools that help you understand how a business is doing. You can spot problems early, track growth, and make smart plans. Just remember — look at the full picture. One ratio can’t tell you everything.
If you haven’t started already, begin including ratio ratios in your weekly reports. Use them to support real decisions — like cutting operating expenses or investing in growth.
Frequently Asked Questions
What are the most important financial ratios?
That depends on your goal. If you’re looking at profit, focus on ROE and ROA. If you’re checking how well the company runs, look at inventory turnover or operating expenses. For debt levels, use debt-to-equity.
Why include ratios in a weekly management report?
Because they make data clear. You can see changes right away and act faster. Including ratios also helps different teams understand the company’s financial health.
What’s a healthy current ratio?
Usually, anything over 1 means the company can pay short-term bills. But it depends on your industry. Tech companies may be okay with less, while retailers need more.
How do I use ratios to evaluate a company?
Start by grouping ratios (profit, risk, efficiency). Compare them to last year or to other companies. Don’t rely on one number — use a mix.
Do small businesses need ratio analysis too?
Yes! Even basic ratios help. Knowing how much of your sales go to costs or how fast you get paid by customers can make a huge difference.
