Key Financial Ratios: Formulas, Tools & Cheat Sheet (2026)

Key Financial Ratios: The Ultimate Guide with Formulas, Tools & Real-World Case Studies (2026)

by Vicky Sarin, CA (25+ Years Post-Qualification Experience)

Twenty-three years ago, I was reviewing the books of what appeared to be a thriving retail chain. The income statement showed healthy profits of ₹8 crores. The owner was planning an aggressive expansion. But when I calculated their current ratio (0.6) and quick ratio (0.3), alarm bells went off. Within six months, despite being "profitable," they couldn't pay suppliers and faced a liquidity crisis.

That experience taught me a lesson I've carried through 25+ years as a Chartered Accountant: financial statements tell you what happened, but financial ratios tell you what it means.

As a CA who has conducted statutory audits for 200+ companies and trained over 2,000 finance professionals, I've seen how mastering financial ratios transforms decision-making. Whether you're analyzing your own business, evaluating investment opportunities, or preparing for investor meetings, understanding these metrics is non-negotiable.

This comprehensive guide covers 25+ essential financial ratios with formulas, real-world examples from my practice, industry benchmarks, interactive calculators, and case studies showing how these numbers drive actual business decisions.

What Are Financial Ratios?

Financial ratios are quantitative metrics calculated from financial statements (balance sheet, income statement, cash flow statement) to evaluate a company's performance, efficiency, liquidity, leverage, and profitability.

Think of them as your business's vital signs – just as doctors use blood pressure, heart rate, and cholesterol levels to assess health, financial professionals use ratios to diagnose financial health.

Why I Rely on Ratios More Than Absolute Numbers

In my early audit days, I reviewed two manufacturing companies. Company A had ₹50 crores revenue; Company B had ₹30 crores. At first glance, A seemed stronger. But after calculating ratios:

Company A:

• Net Profit Margin: 2%

• Current Ratio: 0.8

• Debt-to-Equity: 3.2

Company B:

• Net Profit Margin: 12%

• Current Ratio: 2.1

• Debt-to-Equity: 0.6

Company B was significantly healthier despite lower revenue. Ratios revealed the truth that absolute numbers obscured.

Why Financial Ratios Matter for Business Analysis

Keywords: financial ratio analysis, financial ratios for business analysis

Based on my 25 years advising businesses, here's where financial ratios create real impact:

1. Diagnose Problems Before They Become Crises

Real example from my practice: A software services company showed 15% year-over-year revenue growth. Management was celebrating. But I noticed their Days Sales Outstanding (DSO) had climbed from 45 to 78 days, and their current ratio dropped from 2.1 to 1.3.

Diagnosis: They were booking revenue aggressively but struggling to collect. Within two quarters, they faced a working capital crunch requiring emergency funding.

2. Benchmark Performance Against Competitors

During a due diligence project, I compared a target company's ratios against three industry peers:

This revealed the company was operationally efficient but had margin problems – leading to pricing strategy discussions during negotiations.

3. Attract Investors and Lenders

I've helped 30+ startups prepare for funding rounds. Investors consistently focus on:

• Gross Margin (indicates scalability)

• Burn Rate and Runway (survival timeline)

• CAC Payback Period (unit economics)

• Debt Service Coverage (for lenders)

Companies that present these proactively get better valuations and terms.

4. Track Improvement Over Time

One retail client I advised tracked these monthly:

• Inventory Turnover: Improved from 4x to 7x over 18 months (freed up ₹40 lakhs cash)

• Gross Margin: Increased from 32% to 38% through better sourcing

• Current Ratio: Stabilized at 1.8 from volatile 0.9-2.3 range

Consistent monitoring enabled proactive management.

The Five Categories of Financial Ratios

 Financial ratios fall into five core categories. Here's my framework for understanding each:

Category 1: Liquidity Ratios

Question they answer: Can we pay our bills?

Keywords: liquidity ratios, current ratio, quick ratio

Most critical for: Businesses with tight cash flows, seasonal operations, or rapid growth

Key ratios:

• Current Ratio
• Quick Ratio (Acid-Test Ratio)
• Cash Ratio

High bad debts negatively impact receivables turnover. Learn how to account for bad debts and provisions

Category 2: Profitability Ratios

Question they answer: Are we making money?

Keywords: profitability ratios, profit margin, return on assets, return on equity

Most critical for: Investors, strategic planning, pricing decisions

Key ratios:

• Gross Profit Margin
• Operating Profit Margin
• Net Profit Margin
• Return on Assets (ROA)
• Return on Equity (ROE)
• Return on Investment (ROI)

Category 3: Leverage/Solvency Ratios

Question they answer: Can we handle our debt?

Keywords: leverage ratios, solvency ratios, debt to equity ratio

Most critical for: Companies considering borrowing, lenders, risk assessment

Key ratios:

• Debt-to-Equity Ratio
• Debt-to-Assets Ratio
• Interest Coverage Ratio
• Debt Service Coverage Ratio

Category 4: Efficiency/Activity Ratios

Question they answer: How well do we use our assets?

Keywords: efficiency ratios, activity ratios, turnover ratios

Most critical for: Operational improvement, working capital management

Key ratios:

• Inventory Turnover
• Receivables Turnover / Days Sales Outstanding
• Asset Turnover
• Payables Turnover

Category 5: Market Value Ratios

Question they answer: What's our market valuation?

Keywords: market value ratios, price to earnings ratio, earnings per share

Most critical for: Public companies, investors, equity valuation

Key ratios:

• Price-to-Earnings (P/E) Ratio
• Earnings Per Share (EPS)
• Price-to-Book (P/B) Ratio
• Dividend Yield

25+ Key Financial Ratios: Formulas, Interpretation & Real Examples

Here's your comprehensive reference with formulas I use daily in my practice:

LIQUIDITY RATIOS

1. Current Ratio

Formula: Current Assets ÷ Current Liabilities

What it tells you: For every ₹1 of short-term debt, how much liquid assets do you have?

Healthy range: 1.5 - 2.5 (varies by industry)

Real example from my audit:

Company with ₹80 lakhs current assets and ₹40 lakhs current liabilities.

Current Ratio = 80 ÷ 40 = 2.0 ✅ Healthy

Red flag: Ratio below 1.0 indicates potential difficulty meeting short-term obligations.

2. Quick Ratio (Acid-Test Ratio)

Formula: (Current Assets - Inventory) ÷ Current Liabilities

What it tells you: Can you pay immediate obligations without selling inventory?

Healthy range: 1.0 - 1.5

Why I use it: During the 2020 pandemic, many retailers had healthy current ratios but couldn't liquidate inventory. Quick ratio revealed the real liquidity problem.

Example:

Current Assets: ₹80L, Inventory: ₹35L, Current Liabilities: ₹40L

Quick Ratio = (80 - 35) ÷ 40 = 1.125 ✅ Acceptable

3. Cash Ratio

Formula: (Cash + Marketable Securities) ÷ Current Liabilities

What it tells you: Most conservative liquidity measure – can you pay debts with cash on hand?

Healthy range: 0.5 - 1.0

When I use it: Assessing companies in financial distress or evaluating acquisition targets.

PROFITABILITY RATIOS

4. Gross Profit Margin

Formula: (Revenue - Cost of Goods Sold) ÷ Revenue × 100

What it tells you: Profitability after direct production costs, before overhead.

Healthy range:

• Retail: 20-40%
• SaaS/Software: 70-85%
• Manufacturing: 20-35%
• Professional Services: 50-70%

Real case from my practice:

E-commerce client had 22% gross margin vs. 35% industry average. Investigation revealed:

• Inefficient procurement (no volume discounts)
• High returns/damages (8% vs. 3% benchmark)
• Underpriced SKUs

After addressing these, margin improved to 31% within 9 months.

5. Operating Profit Margin (EBIT Margin)

Formula: Operating Profit (EBIT) ÷ Revenue × 100

What it tells you: Profitability from core operations before interest and taxes.

Why it matters: Isolates operational efficiency from financing and tax decisions.

Example:

Revenue: ₹100 crores, COGS: ₹60 crores, Operating Expenses: ₹25 crores

Operating Profit = 100 - 60 - 25 = ₹15 crores

Operating Margin = 15 ÷ 100 × 100 = 15%

6. Net Profit Margin

Formula: Net Profit ÷ Revenue × 100

What it tells you: Bottom-line profitability after all expenses, interest, and taxes.

Healthy range:

• High-margin businesses (SaaS, Consulting): 15-25%
• Mid-margin (Retail, Manufacturing): 5-10%
• Low-margin (Grocery, Commodity Trading): 1-3%

Critical insight: Always compare net margin trend over time. Declining margins despite revenue growth signal problems.

7. Return on Assets (ROA)

Formula: Net Income ÷ Total Assets × 100

What it tells you: How efficiently you're using assets to generate profit.

Healthy range: 5-20% (higher is better; varies significantly by industry)

When I use it: Comparing capital-intensive vs. asset-light businesses.

Example from due diligence:

Company A: ₹10Cr profit, ₹100Cr assets → ROA = 10%

Company B: ₹10Cr profit, ₹50Cr assets → ROA = 20% ✅ More efficient

8. Return on Equity (ROE)

Formula: Net Income ÷ Shareholders' Equity × 100

What it tells you: Return generated on shareholder investment.

Healthy range: 15-20% is considered good; >20% is excellent

Why investors love it: Shows how effectively management deploys shareholder capital.

Real example:

I advised a manufacturing company with ROE of 8% vs. industry average of 18%. Analysis revealed:

• Excessive cash sitting idle (₹30 crores earning 4%)
• Underutilized capacity (running at 60%)

Recommendations: Deploy cash for expansion, improve capacity utilization → ROE target of 16% within 2 years.

9. Return on Investment (ROI)

Formula: (Gain from Investment - Cost of Investment) ÷ Cost of Investment × 100

What it tells you: Profitability of specific investments or projects.

Application: Evaluating marketing campaigns, equipment purchases, expansion decisions.

Example from my consulting:

Client invested ₹15 lakhs in automation.

Annual savings: ₹6 lakhs

3-year total savings: ₹18 lakhs

ROI = (18 - 15) ÷ 15 × 100 = 20% over 3 years

LEVERAGE / SOLVENCY RATIOS

10. Debt-to-Equity Ratio (D/E)

Formula: Total Debt ÷ Shareholders' Equity

What it tells you: Financial leverage – how much debt vs. equity finances the business.

Healthy range:

• Conservative: < 0.5
• Moderate: 0.5 - 1.5
• Aggressive: > 2.0

Industry variations:

• Capital-intensive (Real Estate, Infrastructure): 2.0-3.0 acceptable
• Tech/Services: < 0.5 preferable
• Startups: Often >2.0 initially (pre-revenue)

Red flag from my audits: Company with D/E of 4.2 struggled with:

• High interest burden reducing profitability
• Difficulty securing additional credit
• Vulnerability to interest rate hikes

11. Debt-to-Assets Ratio

Formula: Total Debt ÷ Total Assets

What it tells you: What percentage of assets are financed by debt?

Healthy range: < 0.4 (40%) is conservative; > 0.6 (60%) is risky

Example:

Total Assets: ₹200 crores

Total Debt: ₹80 crores

Debt

 Continuing the Financial Ratios blog...

Example:

Total Assets: ₹200 crores

Total Debt: ₹80 crores

Debt-to-Assets = 80 ÷ 200 = 0.40 or 40% ✅ Acceptable

Interpretation: 40% of assets are debt-financed; 60% are equity-financed.

12. Interest Coverage Ratio (Times Interest Earned)

Formula: EBIT (Earnings Before Interest & Tax) ÷ Interest Expense

What it tells you: How many times can you cover interest payments with operating profit?

Healthy range:

• Minimum acceptable: 2.0x
• Comfortable: 3.0-5.0x
• Strong: >5.0x

Critical importance: This ratio saved a client from disaster. Their bank required minimum 2.5x interest coverage.When I projected it would drop to 2.1x next quarter due to declining margins, we immediately:

• Renegotiated payment terms with customers
• Cut discretionary spending
• Secured a short-term working capital facility

We avoided covenant breach and maintained banking relationship.

Example:

EBIT: ₹50 crores

Interest Expense: ₹8 crores

Interest Coverage = 50 ÷ 8 = 6.25x ✅ Strong

13. Debt Service Coverage Ratio (DSCR)

Formula: Net Operating Income ÷ Total Debt Service (Principal + Interest)

What it tells you: Can you cover both principal and interest payments?

Healthy range:

• Minimum for lenders: 1.25x
• Preferred: 1.5-2.0x

When lenders use it: Term loan approvals, mortgage underwriting, project financing.

Real case: A manufacturing company applying for ₹40 crore term loan showed:

• Net Operating Income: ₹12 crores annually
• Proposed annual debt service: ₹6 crores
• DSCR = 12 ÷ 6 = 2.0x → Loan approved

EFFICIENCY / ACTIVITY RATIOS

14. Inventory Turnover Ratio

Formula: Cost of Goods Sold ÷ Average Inventory

What it tells you: How many times inventory is sold and replaced during a period.

Healthy range: (highly industry-dependent)

• Grocery/Perishables: 15-30x
• Fashion Retail: 4-8x
• Auto Dealers: 6-10x
• Luxury Goods: 2-4x

Real transformation story: A fashion retailer I advised had inventory turnover of 3.2x (industry average: 6x). This meant:

• Cash locked in slow-moving stock
• Higher storage costs
• Markdowns on outdated styles

Actions taken:

• Improved demand forecasting
• Reduced SKU complexity (from 500 to 280 SKUs)
• Implemented just-in-time ordering for fast-fashion items

Result: Turnover improved to 5.8x over 18 months, freeing up ₹65 lakhs in working capital.

Formula variation: Days Inventory Outstanding (DIO) = 365 ÷ Inventory Turnover

Lower DIO is better (inventory moves faster).

15. Accounts Receivable Turnover

Formula: Net Credit Sales ÷ Average Accounts Receivable

What it tells you: How quickly you collect from customers.

Example:

Annual Credit Sales: ₹120 crores

Average A/R: ₹20 crores

A/R Turnover = 120 ÷ 20 = 6x (you collect 6 times per year)

16. Days Sales Outstanding (DSO)

Formula: 365 ÷ Accounts Receivable Turnover

OR: (Accounts Receivable ÷ Net Credit Sales) × 365

What it tells you: Average number of days to collect payment after a sale.

Healthy range:

• B2B Services: 30-60 days
• Manufacturing: 45-75 days
• Retail: <10 days (mostly cash)

Red flag case: Software company with DSO of 110 days despite 30-day payment terms. Investigation revealed:

• No follow-up process for overdue invoices
• Loose credit approval (high-risk customers)
• Invoice disputes due to poor documentation

After implementing collection workflow and credit checks, DSO dropped to 52 days.

Calculation example:

A/R: ₹15 crores

Annual Credit Sales: ₹100 crores

DSO = (15 ÷ 100) × 365 = 54.75 days

17. Asset Turnover Ratio

Formula: Net Sales ÷ Average Total Assets

What it tells you: Revenue generated per rupee of assets employed.

Healthy range:

• Capital-intensive (Manufacturing): 0.5-1.5x
• Retail: 2.0-3.0x
• Services: 1.5-2.5x

Strategic insight: I compared two IT companies:

• Company A: ₹50Cr revenue, ₹40Cr assets → Turnover = 1.25x
• Company B: ₹50Cr revenue, ₹25Cr assets → Turnover = 2.0x

Company B was more asset-efficient (likely outsourcing infrastructure, using cloud vs. owned servers).

18. Payables Turnover Ratio

Formula: Cost of Goods Sold ÷ Average Accounts Payable

What it tells you: How quickly you pay suppliers.

Days Payable Outstanding (DPO): 365 ÷ Payables Turnover

Strategic balance:

• High DPO = You keep cash longer (good for working capital) but may strain supplier relationships
• Low DPO = Quick payment may earn discounts but uses cash

Example from my advisory practice:

Client was paying suppliers in 25 days (DPO = 25) while collecting from customers in 60 days (DSO = 60).

Cash conversion cycle = 60 - 25 = 35 days of working capital needed.

We negotiated supplier terms from 25 to 45 days, reducing working capital requirements by ₹40 lakhs.

19. Cash Conversion Cycle (CCC)

Formula: DIO + DSO - DPO

Where:

• DIO = Days Inventory Outstanding
• DSO = Days Sales Outstanding
• DPO = Days Payable Outstanding

What it tells you: How long cash is tied up in operations before converting back to cash.

Lower is better (negative CCC is ideal but rare).

Real example:

• DIO = 45 days (inventory sits 45 days)
• DSO = 60 days (customers pay in 60 days)
• DPO = 30 days (you pay suppliers in 30 days)
• CCC = 45 + 60 - 30 = 75 days

Interpretation: Your cash is locked in operations for 75 days. During growth, this creates working capital strain.

Benchmark: Amazon famously has negative CCC (they collect from customers before paying suppliers).

MARKET VALUE RATIOS

20. Earnings Per Share (EPS)

Formula: (Net Income - Preference Dividends) ÷ Weighted Average Number of Shares Outstanding

What it tells you: Profit attributable to each share of stock.

Why it matters: Key metric for investors; companies often manage operations to hit EPS targets.

Example:

Net Income: ₹10 crores

Outstanding Shares: 1 crore

EPS = ₹10 per share

21. Price-to-Earnings Ratio (P/E Ratio)

Formula: Market Price Per Share ÷ Earnings Per Share

What it tells you: How much investors pay for ₹1 of earnings.

Interpretation:

• High P/E (>20-25): Market expects high growth; stock may be overvalued
• Low P/E (<10-15): Market has low growth expectations; stock may be undervalued
• Compare to industry: Tech stocks often have P/E of 30-50; mature utilities might be 10-15

Example:

Share Price: ₹500

EPS: ₹25

P/E Ratio = 500 ÷ 25 = 20x

Real valuation case: During a startup advisory, the founder cited a competitor's valuation at 80x P/E. However, the competitor had:

• 200% YoY growth vs. client's 40%
• Superior margins (42% vs. 28%)
• Path to profitability in 12 months vs. 24+ months

Context matters more than the absolute ratio.

22. Price-to-Book Ratio (P/B Ratio)

Formula: Market Price Per Share ÷ Book Value Per Share

What it tells you: Premium/discount to book value (net assets).

Healthy range:

• P/B > 1: Stock trades above book value (common for profitable companies)
• P/B < 1: Trades below book value (potential value opportunity or sign of trouble)

When I use it: Valuing asset-heavy businesses (banks, real estate, manufacturing).

23. Dividend Yield

Formula: Annual Dividends Per Share ÷ Market Price Per Share × 100

What it tells you: Return from dividends alone, excluding capital appreciation.

Example:

Annual Dividend: ₹20 per share

Share Price: ₹500

Dividend Yield = 20 ÷ 500 × 100 = 4%

Investor perspective: High dividend yield attracts income-focused investors; growth companies often pay no dividends, reinvesting profits.

24. Price/Earnings to Growth Ratio (PEG Ratio)

Formula: P/E Ratio ÷ Annual EPS Growth Rate

What it tells you: Whether a high P/E is justified by growth.

Interpretation:

• PEG < 1: Potentially undervalued
• PEG = 1: Fairly valued
• PEG > 2: Potentially overvalued (paying too much for growth)

Example:

P/E Ratio: 30

Expected EPS Growth: 25% annually

PEG = 30 ÷ 25 = 1.2 → Reasonably priced for growth

STARTUP-SPECIFIC RATIOS

25. Burn Rate

Formula: (Starting Cash - Ending Cash) ÷ Number of Months

What it tells you: How quickly you're consuming cash.

Critical for: Pre-revenue or negative cash flow businesses.

Example:

Started year with ₹2 crores cash

After 6 months, have ₹1.4 crores

Burn Rate = (2 - 1.4) ÷ 6 = ₹10 lakhs per month

26. Runway

Formula: Current Cash Balance ÷ Monthly Burn Rate

What it tells you: How many months before you run out of cash.

Example:

Cash: ₹1.4 crores

Monthly Burn: ₹10 lakhs

Runway = 14 months

My advice to startups: Always know your runway. Start fundraising when you have 6-9 months left, not 2-3 months.

27. Customer Acquisition Cost (CAC)

Formula: Total Sales & Marketing Costs ÷ Number of New Customers Acquired

What it tells you: Cost to acquire one customer.

Example:

Marketing spend: ₹20 lakhs

New customers: 500

CAC = ₹4,000 per customer

28. Customer Lifetime Value (LTV)

Formula: Average Revenue Per Customer × Gross Margin % × Average Customer Lifespan

What it tells you: Total profit from one customer over their relationship with you.

Example:

Subscription: ₹10,000/year

Gross Margin: 70%

Average retention: 3 years

LTV = 10,000 × 0.70 × 3 = ₹21,000

29. LTV:CAC Ratio

Formula: Customer Lifetime Value ÷ Customer Acquisition Cost

What it tells you: Return on customer acquisition investment.

Healthy range:

• Minimum: 3:1
• Excellent: 5:1 or higher
• 10:1: May indicate under-investment in growth

Example from SaaS advisory:

LTV: ₹21,000

CAC: ₹4,000

LTV:CAC = 21,000 ÷ 4,000 = 5.25:1 ✅ Healthy unit economics

Common Mistakes to Avoid When Using Financial Ratios

After reviewing thousands of financial analyses, here are the mistakes I see most frequently:

Mistake #1: Analyzing Ratios in Isolation

The Error:

"Our current ratio is 2.5, so we're healthy!"

The Reality:

I audited a company with current ratio of 3.2 that went bankrupt within 6 months. How?

• 80% of current assets were slow-moving inventory (couldn't convert to cash)
• Quick ratio was only 0.7
• DSO was 95 days with deteriorating receivables quality

Lesson: Always analyze multiple ratios together. Cross-validate findings.

Mistake #2: Ignoring Industry Context

The Error:

Using generic benchmarks without considering industry norms.

Example:

A supermarket chain had current ratio of 0.8 – which would be alarming for most businesses. But in grocery retailwhere inventory turns 25x annually and customers pay cash, this is perfectly normal. Meanwhile, their inventory turnover of 18x was actually below the 25x industry benchmark, indicating problems.

Lesson: Always compare against industry-specific benchmarks, not generic rules.

Mistake #3: Focusing Only on Historical Ratios

The Error:

"Our ratios have been healthy for years, so we're fine."

Reality Check:

During 2019, I reviewed a hospitality company with excellent historical ratios:

• Current Ratio: 2.1
• D/E: 0.6
• ROE: 22%
• Interest Coverage: 5.8x

Then COVID-19 hit. Within 3 months:

• Revenue collapsed 85%
• Current Ratio: 0.4
• Interest Coverage: 0.3x
• Emergency restructuring required

Lesson: Use scenario planning. Stress-test ratios under adverse conditions. What if revenue drops 30%? What if key customers delay payments?

Mistake #4: Misclassifying Financial Statement Items

The Error:

Incorrectly categorizing items, leading to distorted ratios.

Examples I've caught:

• Long-term loans shown as current liabilities → artificially depressed current ratio
• Owner's personal expenses in business books → overstated expenses, understated profit margins
• Capital expenditure treated as expense → understated assets and profit
• Inventory obsolescence not written down → overstated current assets and gross margin

Lesson: Ensure financial statements follow accounting standards (IND AS/IFRS/GAAP) before calculating ratios.

Mistake #5: Comparing Companies of Vastly Different Sizes

The Error:

"Our ROE is 12% vs. competitor's 18%, so they're better."

Reality:

Scale matters. A ₹10 crore company might achieve 25% ROE, but sustaining that at ₹500 crore scale is nearly impossible. Conversely, a ₹500 crore company with 15% ROE is generating ₹75 crores profit – far more impressive than a small company's ₹2.5 crore profit at 25% ROE.

Lesson: Compare like-sized companies, or use industry-adjusted benchmarks.

Mistake #6: Ignoring Seasonality

The Error:

Making conclusions based on single-period ratios without considering business cycles.

Example:

A toy manufacturer had:

• September: Current Ratio 3.5 (building inventory for holiday season)
• December: Current Ratio 1.2 (inventory sold, receivables high)
• February: Current Ratio 2.1 (receivables collected)

Someone analyzing only December data might panic about the 1.2 ratio, when it's actually normal for their business cycle.

Lesson: Track ratios across complete business cycles. For seasonal businesses, compare same period year-over-year.

Mistake #7: Over-Relying on Ratios for Decision-Making

The Error:

"The ratios look good, so let's proceed."

What Ratios Don't Tell You:

• Quality of management – competence, integrity, vision
• Market dynamics – competitive threats, disruption, regulatory changes
• Intangibles – brand value, customer loyalty, employee morale
• Future potential – innovation pipeline, market opportunities

Case Example:

Two companies I evaluated for acquisition had nearly identical ratios. But:

• Company A: Founder-dependent, aging customer base, declining industry
• Company B: Strong management team, growing market, recurring revenue model

Company B was worth 40% more despite similar financial ratios.

Lesson: Use ratios as diagnostic tools, not decision-making substitutes. Combine quantitative (ratios) with qualitative analysis.

One Final Insight

The most financially successful businesses I've advised don't have "perfect" ratios. They have appropriate ratios for their strategy, monitored consistently, and acted upon promptly.

A high-growth SaaS startup with negative margins and high burn rate isn't "wrong" – it's investing in growth. But they better know their runway, their unit economics, and their path to profitability.

A mature manufacturing company with 5% net margin isn't "failing" – if their ROE is 18%, they're efficiently deploying capital.

Know your numbers. Understand what they mean. Act on what they tell you.

That's the power of financial ratios.

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