5 Financial Ratios Every Business Owner Should Track
Understanding the numbers behind your business operations is crucial. As a business owner, it’s not enough to simply look at your sales figures. Financial ratios provide a clear and comprehensive picture of your company’s health. These are the financial ratios for business owners.
At Makwana Sweta & Associates, we emphasize the importance of financial literacy for all business owners. Whether you’re a startup founder or running a growing MSME, these five financial ratios can become your best allies.
1. Current Ratio (Financial Ratio for Liquidity)
Formula:
Current Ratio = Current Assets / Current Liabilities
This ratio measures your business’s ability to meet short-term obligations with short-term assets. A healthy current ratio generally falls between 1.5 to 2.
Why it matters:
It indicates liquidity. If your current liabilities exceed your assets, it may be a sign of cash flow issues.
Tip: Track this ratio monthly to avoid working capital crunches.
2. Net Profit Margin (Financial Ratio for Profitability)
Formula:
Net Profit Margin = (Net Profit / Revenue) x 100
This percentage tells you how much profit your business earns after deducting all expenses, including taxes and interest.
Why it matters:
A higher margin means your business is efficient and profitable. Compare it across months and with industry benchmarks.
Pro Insight: CA services in Mumbai often recommend using this ratio during pricing reviews and cost analysis.
3. Debt-to-Equity Ratio (Financial Ratio Indicating Leverage)
Formula:
Debt-to-Equity Ratio = Total Debt / Shareholders’ Equity
This ratio shows how much debt your business has taken relative to its equity.
Why it matters:
It reflects financial stability. A ratio above 2 could suggest a high reliance on external funds.
Transition Tip: Shift to equity-based funding if this ratio stays consistently high.
4. Inventory Turnover Ratio (Financial Ratio Indicating Efficiency)
Formula:
Inventory Turnover = Cost of Goods Sold / Average Inventory
This metric shows how often your business sells and replaces its inventory over a period.
Why it matters:
A higher turnover rate indicates efficient inventory management. If it’s too low, it could mean overstocking or slow sales.
Use Case: Tax consultants in Mumbai often analyze this during GST and stock audits.
5. Return on Capital Employed (Financial Ratio for Profitability)
Formula:
ROCE = EBIT / Capital Employed x 100
ROCE evaluates how efficiently your business generates profits from its capital base.
Why it matters:
It helps you understand how well your investments are performing. The higher, the better.
Ideal for: Long-term planning and investor reporting.
Bonus: Use These Ratios to Guide Strategic Decisions
By monitoring these financial ratios monthly or quarterly, you gain deeper control over your business. It’s not about reacting to problems after they arise. It’s about being proactive and steering your company toward long-term success.
At Makwana Sweta & Associates, a trusted Chartered Accountant firm based in Mumbai, we help businesses across India interpret and act on financial data. If you’re looking for Chartered Accountant Services in Mumbai or need help from Tax Consultants in Mumbai, our expert team can assist you.
Inbound and Outbound Links:
- Inbound: Understanding Advance Tax
- Outbound: RBI Financial Stability Reports
Conclusion:
Numbers don’t lie. These five key financial ratios empower you to understand your business’s strengths and weaknesses. Use them wisely, and don’t hesitate to seek professional guidance when needed.