Financial ratios compare financial figures to describe a business’s profitability, liquidity, financing or use of assets. Most use accounting information, while market-based ratios also use figures such as the share price.
A ratio needs a defined numerator, denominator and period. The same label can be calculated differently by different analysts, so a comparison is only reliable when its basis is consistent.
What do the main groups measure?
Liquidity ratios concern short-term obligations. Profitability ratios relate profit to revenue, assets or equity. Leverage ratios examine financing and debt exposure, including short-term as well as long-term borrowing.
Activity ratios describe how assets are used. Valuation and distribution measures relate market prices, earnings and dividends. The SEC’s financial-statement guide explains several common calculations.
| Measure | Example formula | What it expresses |
|---|---|---|
| Current ratio | Current assets ÷ current liabilities | Short-term asset coverage |
| Operating margin | Operating profit ÷ revenue × 100 | Operating profit as a percentage of sales |
| Inventory turnover | Cost of sales ÷ average inventory | Turnover during the stated period |
| Debt to equity | Defined debt measure ÷ equity | Leverage on the stated basis |
| Dividend yield | Annual dividends per share ÷ share price × 100 | Dividend relative to that price |
Interest-bearing debt and total liabilities are not interchangeable. A ratio using total liabilities should be labelled accordingly. Leases, cash netting and other adjustments also need a stated treatment.
How should the result be expressed?
A ratio may be stated as a multiple, percentage, number of days or another unit. There is no rule that all results below one must be percentages or that results above one must be decimals.
Suppose current assets are $300,000 and current liabilities are $200,000. The current ratio is 1.5 times, or 1.5:1. Separately, operating profit of $40,000 on revenue of $200,000 gives an operating margin of 20%.
The ACRA financial-profile guide identifies units and formulas for its ratios. A value of 1.5 could also be expressed mathematically as 150%, but the conventional unit and the relationship being measured should remain clear.
What can make comparisons misleading?
Seasonality, one-off transactions, accounting policies and business models can change ratios. A year-end balance may be unrepresentative; a flow such as annual sales is often compared with an average asset balance.
Zero denominators make division undefined. Negative equity or losses can make familiar interpretations unreliable. A high current ratio may include slow-moving inventory or overdue receivables, so it does not guarantee timely cash payments.
Are national economic ratios the same?
Countries also use financial indicators. For example, the World Bank defines reserves in months of imports as reserves divided by average monthly imports. Reserves of $60 billion and monthly imports of $10 billion give six months of coverage.
Reversing that fraction produces a different measure. The IMF assesses reserve adequacy using several risks and indicators; import coverage alone is not a verdict on sovereign creditworthiness.
Video introduction
This short introduction describes common uses of accounting ratios. Ratios can identify warning signs, but they cannot establish future solvency or profitability with certainty.
Last checked and updated on November 10, 2026 by the MBN editorial team.