The Six Financial Ratios That Matter Most
Financial ratios convert raw financial statement numbers into comparable metrics. Here are the six every business owner and analyst should track.
1. Gross Margin
Formula: (Revenue − COGS) ÷ Revenue × 100
Measures pricing power and production efficiency. SaaS companies target 70–80%; manufacturers 25–45%.
2. Net Margin
Formula: Net Income ÷ Revenue × 100
The bottom line — what percentage of revenue becomes profit after all expenses.
3. Return on Equity (ROE)
Formula: Net Income ÷ Shareholders' Equity × 100
How effectively management uses equity capital to generate returns. S&P 500 average is ~15%.
4. Return on Assets (ROA)
Formula: Net Income ÷ Total Assets × 100
Asset utilization efficiency. Asset-light businesses (software, consulting) score 10–25%; capital-intensive companies (utilities, manufacturing) often score 2–6%.
5. Debt-to-Equity Ratio
Formula: Total Debt ÷ Shareholders' Equity
Financial leverage. A D/E above 2.0 typically indicates significant leverage risk, though capital-intensive industries like real estate and utilities naturally run higher.
6. Current Ratio
Formula: Current Assets ÷ Current Liabilities
Short-term liquidity. Below 1.0 = potential cash flow problem; 1.5–2.5 = healthy range.
Using Ratios Together
No ratio works in isolation. High ROE with high D/E might mean leverage is artificially inflating returns. Strong margins with a weak current ratio could indicate a cash crunch despite profitability.
Use the Financial Ratios Calculator to calculate all six at once and get a complete picture.