10 Financial Ratios Every Manager Should Know

Tuesday, 1 September 2026

You do not need an accounting qualification to use these ratios. What you need is an understanding of which ratio answers which question and how to interpret the result in context. The Corporate Finance Institute (CFI) groups financial ratios into five categories: liquidity, leverage (or solvency), efficiency, profitability and market value. This article covers 10 of the most widely used ratios across the first four categories, chosen because they are the ones managers are most likely to encounter in board papers, business cases, supplier assessments and investment decisions.

Profitability ratios: is the business making money?

Profitability ratios measure how effectively a business converts revenue into earnings. They answer the question that sits behind every commercial decision: is the money coming in actually turning into profit, and if so, how much?

Gross profit margin is calculated by subtracting the cost of goods sold from revenue, then dividing the result by revenue. It tells you how much of each dollar of revenue remains after covering the direct costs of producing what was sold. A business with a gross margin of 40% retains 40 cents from every dollar before overheads, interest and tax are deducted. Tracking gross margin over time reveals whether the cost base is stable or whether input costs, pricing pressure or product mix changes are eroding the buffer between revenue and cost.

Net profit margin takes the analysis a step further by dividing net profit (after all expenses, interest and tax) by revenue. It shows what percentage of every revenue dollar actually reaches the bottom line. A company with strong gross margins but weak net margins is spending too much on overheads, financing or tax. Comparing net margins across competitors in the same industry is one of the most direct ways to assess relative efficiency.

Return on equity (ROE) measures how much profit a business generates for every dollar of shareholder equity. It is calculated by dividing net income by total shareholders’ equity. ROE is the ratio most commonly used by boards and investors to assess management performance, because it connects profitability to the capital owners have invested. An ROE of 15% means the business generated 15 cents of profit for every dollar of equity. CFI’s financial statement analysis guide notes that ROE is central to evaluating how efficiently a company uses its assets to generate profit.

Liquidity ratios: can the business pay its bills?

Liquidity ratios answer the most immediate financial question: does the business have enough short‑term assets to cover its short‑term obligations? A business can be profitable on paper and still run out of cash to pay suppliers, employees or creditors.

Current ratio is calculated by dividing current assets by current liabilities. A result above 1.0 generally indicates that the business can meet its short‑term obligations. However, context matters. A current ratio of 3.0 might suggest the business is holding too much cash or inventory rather than deploying it productively. A ratio below 1.0 is a warning sign, though some businesses with strong recurring cash flows (such as subscription models) can operate at lower levels. In the Australian public sector, procurement teams often review a supplier’s current ratio as part of due diligence before awarding contracts.

Quick ratio (sometimes called the acid test) strips inventory out of the calculation, dividing only cash, receivables and short‑term investments by current liabilities. It provides a more conservative picture of liquidity because inventory cannot always be converted to cash quickly. For manufacturers and retailers who carry significant stock, the gap between the current ratio and the quick ratio can be substantial, and the quick ratio is often the more revealing figure.

Solvency ratios: how much debt is the business carrying?

Solvency ratios look beyond short‑term liquidity to assess whether a business is funding its operations sustainably over the long term. A business that relies too heavily on debt becomes vulnerable to rising interest rates, credit tightening or downturns in revenue.

Debt‑to‑equity ratio compares total liabilities to total shareholders’ equity. It shows how much of the business is funded by debt versus owner capital. A ratio of 2.0 means the business has two dollars of debt for every dollar of equity. Higher ratios are not automatically concerning if the business generates strong and predictable cash flows, but they do increase exposure to interest rate movements. In Australia’s current economic environment, where the Reserve Bank of Australia has maintained elevated cash rates, this ratio has received heightened attention from analysts, lenders and boards.

Interest coverage ratio divides earnings before interest and tax (EBIT) by interest expense. It tells you how many times the business could cover its interest payments from operating earnings. A ratio of 5.0 means the business earns five times what it needs to service its debt. A ratio approaching 1.0 signals that nearly all operating profit is being consumed by interest, leaving very little margin for error. CPA Australia emphasises that financial statements should be read together with accompanying notes and that every primary statement needs context, and solvency ratios are a good example: a high debt‑to‑equity ratio paired with strong interest coverage tells a very different story from the same ratio paired with weak coverage.

Efficiency ratios: how well is the business using its resources?

Efficiency ratios measure how productively a business uses its assets to generate revenue. They are often the ratios that most directly inform operational decisions, because they highlight where cash or resources may be tied up unnecessarily.

Inventory turnover divides the cost of goods sold by average inventory. A higher number means the business is selling through its stock quickly, which is generally positive because it means less cash is locked up in warehouses. A low turnover figure may indicate overstocking, obsolescence risk or weak demand. Industry context matters here: a fresh food retailer should turn inventory far more frequently than a heavy equipment manufacturer.

Accounts receivable turnover divides net credit sales by average accounts receivable. It measures how quickly customers are paying their invoices. A high ratio means cash is being collected efficiently. A declining ratio over successive periods is a signal that credit terms are loosening, customers are paying more slowly or collection processes need attention. In practical terms, slow receivable cycles mean the business is funding its customers’ cash flow at its own expense.

Return on assets (ROA) divides net income by total assets. It combines profitability with asset utilisation to produce a single measure of how well management is deploying the resources at its disposal. Ryan O’Connell’s financial ratio analysis guide notes that ROA is most useful when compared across companies in the same industry, because asset intensity varies dramatically between sectors. A technology consulting firm will have a very different asset base from a mining company, and comparing their ROA figures without accounting for that difference would be misleading.

Building financial literacy as a management capability

Financial ratio analysis is not a skill reserved for accountants. Every manager who reviews a budget, assesses a supplier, evaluates a business case or presents a spending proposal to a board is working with financial information. Financial literacy is now a baseline expectation across all functions, not just finance.

AcademyGlobal (AG) has been delivering finance and management training for professionals across public, private and not‑for‑profit sectors since 2004. AG’s faculty include finance professionals with backgrounds in financial statement analysis, corporate finance, management accounting and valuation. AG’s programs are designed for working professionals who need to use financial information in their roles, whether or not they hold an accounting qualification.

AG’s Analysing Financial Statements course builds this skill in a focused half‑day format. Participants learn to work through income statements, balance sheets and cash flow statements with a specific question in mind, use ratios and trends to assess performance and spot red flags before they become risks.

Frequently asked questions

What are financial ratios and why do managers need them?

Financial ratios are calculations that compare figures from a company’s financial statements to assess performance, health and risk. Managers need them to make informed decisions about budgets, supplier assessments, business cases and investment proposals, even if they do not work directly in a finance function.

What is the difference between profitability and liquidity?

Profitability measures whether a business is generating earnings from its operations. Liquidity measures whether it has enough short‑term assets to pay its short‑term obligations. A business can be profitable but illiquid if its cash is tied up in inventory or receivables, which is why both sets of ratios need to be read together.

What is a good current ratio?

A current ratio above 1.0 generally indicates the business can meet its short‑term obligations. However, what counts as “good” depends on the industry. Capital‑light service businesses may operate comfortably below 1.5, while manufacturers or distributors may need higher ratios to account for slow‑moving inventory.

How do you calculate return on equity?

Return on equity (ROE) is calculated by dividing net income by total shareholders’ equity. It measures how much profit the business generates for every dollar of owner capital invested. A higher ROE indicates more efficient use of equity, though it should be read alongside the debt‑to‑equity ratio because heavy borrowing can inflate ROE.

Do you need an accounting background to learn financial ratio analysis?

No. Financial ratio analysis is a practical skill that can be learned without formal accounting training. Programs such as AcademyGlobal’s Analysing Financial Statements course are designed for professionals from all backgrounds who need to interpret financial information in their roles.

References

1. Corporate Finance Institute (CFI), ‘Financial Ratios: Complete List and Guide to All Financial Ratios’. Available at: corporatefinanceinstitute.com

2. Corporate Finance Institute (CFI), ‘Analysis of Financial Statements’. Available at: corporatefinanceinstitute.com

3. CPA Australia, ‘Financial Reporting’. Available at: cpaaustralia.com.au

4. University of Sydney Centre for Continuing Education, ‘Finance Course for the Non‑Financial Manager’. Available at: cce.sydney.edu.au

5. O’Connell, R., CFA, ‘Financial Ratio Analysis: A Complete Guide’. Available at: ryanoconnellfinance.com