Financial ratios distil balance sheets and P&Ls into simple numbers that reveal a business's health — its liquidity, profitability, leverage and efficiency.
This guide covers the essential ratios and what each tells you.
What is financial ratios?
Ratios are grouped into liquidity (can it pay short-term bills), profitability (how much profit it makes), solvency (how much debt it carries) and efficiency (how well it uses assets).
Comparing ratios over time and against peers is more useful than any single figure.
Essential ratios
| Ratio | What it shows |
|---|---|
| Current ratio | Short-term liquidity (current assets / current liabilities) |
| Net profit margin | Profit per rupee of sales |
| Debt-to-equity | Leverage / reliance on debt |
| Inventory turnover | How fast stock is sold |
| Return on equity | Profit generated on owners' funds |
Frequently asked questions
What is a good current ratio?
A current ratio around 1.5–2 is often considered healthy, though it varies by industry.
What does debt-to-equity tell me?
How much the business relies on borrowed funds versus owners' funds — higher means more financial risk.