Financial statements are full of numbers, but ratios turn them into answers. With just a handful of ratios you can see how healthy a business really is.
Liquidity: can you pay your bills?
The current ratio is current assets divided by current liabilities. A result above 1 means you can cover short-term obligations.
Profitability: are you making money?
The net profit margin is net profit divided by revenue. It shows how much of every dollar of sales you actually keep.
Leverage: how much debt are you carrying?
The debt-to-equity ratio compares borrowed money with owners’ money. A high number means higher risk if earnings fall.
Efficiency: are assets working hard?
Ratios such as inventory turnover and receivable days show how quickly assets turn into cash.
One ratio is a snapshot. Compare it over time and against your industry.
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