Financial Ratios Every Business Owner Should Know

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Here are some common financial ratios every business owner should know:

1. Liquidity Ratios

These measure a company’s ability to meet short-term obligations.

Current Ratio = Current Assets ÷ Current Liabilities
Quick Ratio (Acid-Test Ratio) = (Current Assets – Inventory) ÷ Current Liabilities
Cash Ratio = Cash and Cash Equivalents ÷ Current Liabilities

2. Profitability Ratios

These measure how efficiently a company generates profit.

Gross Profit Margin = (Revenue – Cost of Goods Sold) ÷ Revenue
Operating Margin = Operating Income ÷ Revenue
Net Profit Margin = Net Income ÷ Revenue
Return on Assets (ROA) = Net Income ÷ Total Assets
Return on Equity (ROE) = Net Income ÷ Shareholders’ Equity
Return on Investment (ROI) = Gain from Investment ÷ Cost of Investment

3. Efficiency / Activity Ratios

These assess how well a company uses its assets.

Inventory Turnover = Cost of Goods Sold ÷ Average Inventory
Accounts Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable
Accounts Payable Turnover = Cost of Goods Sold ÷ Average Accounts Payable
Asset Turnover = Revenue ÷ Average Total Assets
Working Capital Turnover = Revenue ÷ Average Working Capital

4. Solvency / Leverage Ratios

These measure long-term financial stability and debt levels.

Debt-to-Equity Ratio = Total Liabilities ÷ Shareholders’ Equity
Debt Ratio = Total Liabilities ÷ Total Assets
Interest Coverage Ratio = EBIT ÷ Interest Expense
Equity Ratio = Shareholders’ Equity ÷ Total Assets

5. Market Ratios (if publicly traded)

These relate company financials to market performance.

Earnings Per Share (EPS) = Net Income ÷ Shares Outstanding
Price-to-Earnings (P/E) Ratio = Market Price per Share ÷ EPS
Dividend Yield = Annual Dividends ÷ Market Price per Share
Market-to-Book Ratio (P/B) = Market Value per Share ÷ Book Value per Share

6. Cash Flow Ratios

These focus on cash flow health.

Operating Cash Flow Ratio = Cash Flow from Operations ÷ Current Liabilities
Free Cash Flow to Sales = Free Cash Flow ÷ Revenue
Cash Conversion Ratio = Operating Cash Flow ÷ Net Income

💡 Tip: Most accounting reports will directly give you the components (assets, liabilities, revenue, net income, etc.), and you can calculate these ratios to quickly assess the business’s financial health.

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