Financial ratios are used as indicators that allow you to focus attention on the areas of your business that need it. These are the key financial ratios are important to your business.

1. Your Guide to Financial Ratio Analysis
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Key Financial Ratios Help Manage Your Business
Your attention is usually focused on a key area within your company. Maybe that’s in marketing, sales or
technology. Handling the financials may not be your forte. But, it’s important to be able to analyze your
business using financial ratios.
Financial ratios are used as indicators that allow you to zero in on areas of your business that may need
attention, such as liquidity, profitability, operational efficiency, and solvency. Financial ratios are also useful
tools in forecasting and financial analysis. They allow you to set specific goals and track your business’s
progress toward these goals.
It’s important to choose financial ratios that apply to your business. There are hundreds of financial ratios
out there and while some of them apply to all businesses – some of the financial ratios are industry
specific.
Here are the top five most powerful and widely known financial ratios you should use in order to make your
business succeed:
1. Net Profit Margin
This ratio is the most important measurement. With this ratio, you can understand how each dollar earned
by your company is translated into profits.
How to calculate Net Profit Margin:
Net Profit / Net Sales
It indicates how efficient your company is at its cost control. For example, a higher Net Profit Margin
means the business converts its revenue into actual profit more effectively.
You can use this ratio to compare yourself to your industry peers, as well.
2. Current Ratio
This ratio is a performance measurement of a company’s liquidity. The measurement determines if your
business has enough resources to pay its debts over the next year. It includes your company’s cash
amount and inventory.
How to calculate the Current Ratio:
Current Assets / Current Liabilities
Financial lenders who need to decide whether to give the business a short-term loan use this ratio. But, it
can also be used to view a snapshot of the efficiency of the company’s operating cycle or how well it can
turn its product into cash.
3. Debt-to-Equity Ratio (D/E)

2. The Debt-to-Equity Ratio, also known as financial leverage, determines the relative proportion of a
business’s equity and debt used to finance its assets. It’s a very important ratio as it’s used as a standard
for determining a business’s financial performance and whether it’s financially healthy.
How to calculate the D/E Ratio:
Total Liabilities / Shareholders Equity
The D/E ratio also shows the company’s ability to
repay debts. Lenders prefer low D/E ratios. So, if the
ratio is increasing, this means that your business is
not being financed on its own, but instead by creditors
– which could be a bad sign to financial lending
institutions.
4. Quick Ratio
The Quick Ratio, sometimes referred to as the Quick
Assets Ratio or “acid test,” provides you a short-term
view of the company’s cash situation or liquidity in
relation to its short-term debts so you can determine
whether a business can meet its financial obligations if issues arise.
How to calculate the Quick Ratio:
(Current Assets – Inventories)/ Current Liabilities
You are looking for a higher quick ratio here.
5. Return on Equity (ROE) Ratio
The ROE ratio, or Return on Net Worth (RONW), is one of the most important profitability metrics. It shows
you how much profit a business earned compared to the total amount of shareholder equity found on the
balance sheet.
In other words, it measures how profitable a business is for the investor and how profitably it utilizes
equity. Note: this ratio is expressed as a percentage.
How to calculate ROE:
Net Income/Shareholder’s Equity
Financial ratios can be complex, but just by simply converting all of this raw data, which can be found on
financial statements, into information you need helps make your business a success! And, luckily for you –
there is a simpler way to compute most of these complex financial ratios by using IndustriusCFO’s
products that include ratio calculators. Use our financial analysis suite and start building a better, more
profitable business.
Pinpoint that one difference maker that has been eluding you. Know what portions of your business need
attention and adjustments to help you grow and be more profitable. Generate a quick snapshot of your
business’s health and a game plan to begin making improvements today. IndustriusCFO’s ratio calculators
can compute these standard, common ratios:
LIQUIDITY RATIOS:

3. Quick Ratio
Current Ratio
Current Liabilities to Net Worth – this is the measure of the extent to which the enterprise is using
creditor funds vs. their own investment to finance the business.
How to Calculate Current Liabilities to Net Worth:
Current Liabilities/Liabilities + Equity
You don’t want to see a ratio of .5 or higher because that would indicate inadequate owner investment or
an extended accounts payable period.
Current Liabilities to Inventory – this ratio offers an indication of the ability of your firm’s inventory
sales to generate cash needed to meet the short-term obligation of creditors. Look for the result of a
low ratio, which means that your company will be able to meet short-term obligations. A high ratio
may be cause for concern since it may signal a potential cash shortage.
How to Calculate Current Liabilities to Inventory:
Current Liabilities x 100/Available Inventory
Total Liabilities to Net Worth – this ratio reveals the relation between the total debts and the owners’
equity of a company. You want to see a higher ratio here, which indicates less protection for
business’ creditors.
How to Calculate Total Liabilities to Net Worth:
Total Liabilities/Liabilities + Equity
Fixed Assets to Net Worth – The Center for Business Planning says this is the measure of the
extent of an enterprise’s investment in non-liquid and often over valued fixed assets.You don’t want
to see the result of .75 or higher because this indicates possible over-investment and causes a
large annual depreciation charge that will be subtracted from the income statement.
How to Calculate Fixed Assets to Net Worth:
Fixed assets to Net Worth=Net fixed assets/Net Worth
Interest Coverage – this ratio is used to determine how easily your business can pay interest on
outstanding debt.
How to Calculate Interest Coverage:
EBIT/Interest Expense
Cash Conversion Cycle (measured in days) – this ratio measures how fast your business can
convert cash on hand into even more cash on hand.
How to Calculate Cash Conversion Cycle:
Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding
PROFITABILITY RATIOS:
Return on Sales – this ratio is also known as a firm’s operating profit margin and is widely used to

4. evaluate a business’s operational efficiency. This ratio provides insight into how much profit is being
produced per dollar of sales. The ratio is helpful to management.
How to calculate this profitability ratio:
Net Income (Before Interest and Tax)/Sales
Return on Assets – Also known as Return on Investment, this ratio is an indicator of how much
profitable a company is relative to its total assets. It gives you an idea as to how well your company
is using its assets to produce earnings.
How to calculate Return on Assets:
Net Income/Total Assets
It’s also important to note that when performing this calculation, some investors add interest expense back
into net income because they want to use operating returns before cost of borrowing.
Sales per Employee or Revenue per Employee – this ratio will help you examine your business’s
sales in relation to its number of employees. It’s most useful when you compare your results to your
industry peers.
How to calculate Sales per Employee:
Revenue/# of employees
You want to see the highest revenue possible per employee possible because this means there’s higher
productivity.
Profit per Employee – Mark Staniszewski, IndustriusCFO account manager says, “This is a
measure of the profits your firm is generating for each employee working for you. The management
of labor resources is important to the success of your business and you should carefully compare
both sales and profits per employee for your firm with similar firms in your industry.”
How to calculate Profit per Employee:
Net Profit/Number of Employees
Asset Investment to Sales – this ratio measures a company’s efficiency in managing its assets in
relation to the revenue created. The higher this ratio, the smaller the investment required to produce
sales revenue, thus, higher the profitability of the company.
The formula to calculate Asset Investment to Sales:
Sales Revenue/Total Assets
Gross Margin – this ratio is also known as the gross profit margin or gross profit percentage. You
should be continuously monitoring your company’s gross margin ratio to make sure it will result in a
gross profit that will be enough to cover its selling and administrative costs.
How to compute Gross Margin:
Gross Profit Dollars/Net Sales Dollars
Since gross margin ratios vary between industries, you should compare your company’s gross margin

5. ratio to your industry peers.
IndustriusCFO also computes asset efficiency ratios that are measured in days including Collection Period,
Payment Deferral Period, Inventory Turnover, and Age of Inventory. These asset efficiency ratios are not
measured in days: Assets to Sales, Sales to Working Capital, and Accounts Payable to Sales.
Other ratios we compute include Book Value to Total Assets ( Valuation Ratio), Debt to Equity Ratio
(Leverage Ratio), Growth Rate (Growth Ratio), and Sustainable Growth Rate (Growth Ratio).
Financial Ratios Related to Financial Statements
A traditional way to convey relationships between one
aspect of the Income Statement to another, is by way
of percentage. Given the nature of how these
percentages are calculated, they can certainly be
qualified as ratios and provide meaningful information
for comparing your business’s performance against
past operating periods, or comparison to industry
peers.
To illustrate how these ratios can provide impactful
information for your business, let’s assume your business has $1,000,000 in Net Sales. The
business’s Overhead is $100,000. You’ll want to display this as a percentage, which allows you to easily
compare your results to your business’s past performance and against industry peers.
Considering the above example, the calculation would be $100,000/$1,000,000. Overhead is “10%” of Net
Sales. Say, last year, your business’s overhead was 15% of Net Sales, or Industry Peer trends show
Overhead at 12% of Net Sales. As you can see, it’s far easier to compare your results as a percentage
rather than less-than-comparable USD ($) figures.
Income Statement analyses include such financial ratios when displayed in percentage, by showing the
relationship of each Income Statement account as a % of Net Sales:
Cost of Sales OR Cost of Goods Sold (Service company vs. Manufacturing)
Material Cost
Labor Cost
Overhead
Gross Profit Margin (already above)
Operating Expenses
Salaries/Wages
Rent
Bad Debt
Advertising/Marketing
Other Operating Expenses
EBITDA (earnings before interest, tax, depreciation & amortization)
Depreciation & Amortization
EBIT (earnings before interest and taxes, otherwise known as “Operating Profit”)

6. Interest Expense
Other Expense
EBT
Income Taxes
Net Income
The accounts associated with the Assets side of the Balance Sheet are traditionally shown as a % of Total
Assets, and include:
Total Current Assets
Cash
Accounts Receivable
Inventory
Prepaid Expenses
Other Current Assets
Total Non-Current Assets
Fixed Assets
Intangible Assets
Long-Term Investments
Other Non-Current Assets
The accounts associated with the Liabilities & Net Worth side of the Balance Sheet are traditionally shown
as a % of Total Liabilities and include the following:
Total Current Liabilities
Accounts Payable
Short-Term Notes Payable
Bank Loan Payable
Current Maturities of Long-Term Debt
Other Current Liabilities
Total Long-Term Liabilities
Long-Term Notes Payable
Other Non-Current Liabilities
Net Worth
IndustriusCFO’s Financial Ratio Analysis Expands on Traditional Ratios
Net Balance Position (NBP), and NBP Ratio – traditional Liquidity ratios, like the Quick and
Current Ratio tend to cluster aspects of the Balance Sheet and thus, some Liquidity and Asset
Efficiency issues may remain hidden. For example, imagine two companies, one having $100K in
Cash, $400K in Accounts Receivable (AR), the other having $250K in Cash and $250K in AR.
If all else were equal between the two companies, the Quick and Current Ratios would view them as

7. performing equally, because they both have $500K in Current Assets. However, one company has far
better efficiency in AR collection, with much more Cash on hand. This deeper assessment is made
possible, by a proprietary measure developed to tease apart aspects of the Balance Sheet and provide a
more stringent measure of Cash Liquidity. If your NBP is zero or positive, your company is in a decent
liquidity position.
How to calculate Net Balance Position:
Operating Capital Available – Operating Capital Required = NBP
Return on Asset Investment – this is a returns ratio that will allow you to calculate how efficiently
your company is using their total asset base to generate sales. The reason that the return on assets
ratio is also known as the return on investment ratio is because investment refers to a firm’s
investment in its assets.
How to calculate Return on Asset Investment:
Return on Assets = Net Income (Net Profit)/Total Assets= __%
Understanding financial ratios is a key business skill for any entrepreneur or business owner. To
summarize what we’ve discussed in this guide to financial ratio analysis, financial ratios illustrate the
strengths and weaknesses of your business. By analyzing these ratios over time, you have the ability to
notice any unusual fluctuations in financial performance across different operating periods, and when
compared to industry peers or competitors.