Financial Statement Analysis: 5 Ratios Every Manager Should Know

Financial statements are full of signals — if you know where to look. You don’t need to memorise dozens of formulas; a handful of well-chosen ratios will tell you most of what you need to know about a company’s health.

1. Current ratio

Current assets ÷ current liabilities. It answers a simple question: can the business cover its short-term obligations? A ratio comfortably above 1 is usually reassuring.

2. Gross margin

Gross profit ÷ revenue. This shows how much of each dollar of sales survives after the direct cost of delivering it — a first read on pricing power and efficiency.

3. Return on equity

Net income ÷ shareholders’ equity. ROE tells owners how hard their invested capital is working.

4. Debt-to-equity

Total liabilities ÷ equity. A quick gauge of financial leverage and risk appetite.

5. Interest coverage

Operating profit ÷ interest expense. It reveals how comfortably the company services its debt.

Read together — never in isolation — these five ratios give managers a fast, reliable picture of financial health.