Financial ratios are essential for CEOs and CFOs to monitor, as they provide a precise, quantitative assessment of a company’s financial position, operational efficiency, and strategic trajectory. Metrics such as liquidity, profitability, efficiency, solvency, and market ratios offer critical insights into performance, enabling leaders to identify strengths, address vulnerabilities, and drive informed decision-making. Regular review facilitates benchmarking against industry peers and historical trends, ensuring competitive alignment. By analyzing these ratios, executives can mitigate risks, optimize resources, and bolster stakeholder trust. Ultimately, financial ratios equip leadership to align strategies with fiscal objectives, fostering sustainable growth and long-term value creation in a complex business landscape.
Below is a table of the top 30 financial ratios that CEOs and CFOs should review to assess a company’s financial health, operational efficiency, and strategic performance. The ratios are organized by category (Liquidity, Profitability, Efficiency, Solvency, and Market), with each including the ratio name, formula, rationale, and ideal ratio. The ideal ratios are general benchmarks and may vary by industry.
| Category | Ratio Name | Formula | Rationale | Ideal Ratio |
|---|---|---|---|---|
| Liquidity | Current Ratio | Current Assets / Current Liabilities | Measures ability to cover short-term obligations with short-term assets. | 1.5–2.0 |
| Quick Ratio (Acid-Test) | (Current Assets – Inventory) / Current Liabilities | Assesses ability to meet short-term liabilities without relying on inventory sales. | 1.0–1.5 | |
| Cash Ratio | Cash and Cash Equivalents / Current Liabilities | Evaluates ability to pay off current liabilities with cash on hand. | 0.5–1.0 | |
| Operating Cash Flow Ratio | Operating Cash Flow / Current Liabilities | Indicates how well operating cash flow covers short-term liabilities. | >1.0 | |
| Net Working Capital Ratio | (Current Assets – Current Liabilities) / Total Assets | Measures the proportion of net working capital relative to total assets. | Positive, varies by industry | |
| Profitability | Gross Profit Margin | (Gross Profit / Revenue) * 100 | Shows percentage of revenue remaining after cost of goods sold, indicating pricing efficiency. | 30–50% (industry-specific) |
| Operating Profit Margin | (Operating Profit / Revenue) * 100 | Measures profitability from core operations before interest and taxes. | 10–20% (industry-specific) | |
| Net Profit Margin | (Net Income / Revenue) * 100 | Indicates overall profitability after all expenses, reflecting cost management. | 5–15% (industry-specific) | |
| Return on Assets (ROA) | (Net Income / Total Assets) * 100 | Assesses how efficiently assets are used to generate profits. | 5–10% | |
| Return on Equity (ROE) | (Net Income / Shareholders’ Equity) * 100 | Measures return generated on shareholders’ investment. | 15–20% | |
| Return on Invested Capital (ROIC) | (Net Operating Profit After Tax / Invested Capital) * 100 | Evaluates efficiency in generating returns from all capital invested. | > Cost of Capital | |
| EBITDA Margin | (EBITDA / Revenue) * 100 | Shows profitability from core operations, excluding non-cash expenses. | 15–25% (industry-specific) | |
| Efficiency | Inventory Turnover | Cost of Goods Sold / Average Inventory | Measures how quickly inventory is sold, indicating inventory management efficiency. | 5–10 (industry-specific) |
| Accounts Receivable Turnover | Net Credit Sales / Average Accounts Receivable | Assesses how efficiently receivables are collected. | 6–12 (industry-specific) | |
| Accounts Payable Turnover | Cost of Goods Sold / Average Accounts Payable | Evaluates how quickly the company pays suppliers, reflecting cash flow management. | 4–8 (industry-specific) | |
| Asset Turnover Ratio | Revenue / Average Total Assets | Measures how efficiently assets generate revenue. | 0.5–2.0 (industry-specific) | |
| Fixed Asset Turnover | Revenue / Average Net Fixed Assets | Assesses efficiency in using fixed assets to generate sales. | 2–5 (industry-specific) | |
| Days Sales Outstanding (DSO) | (Average Accounts Receivable / Revenue) * 365 | Indicates average days to collect receivables, reflecting credit policy effectiveness. | 30–60 days | |
| Days Inventory Outstanding (DIO) | (Average Inventory / Cost of Goods Sold) * 365 | Measures average days to sell inventory, indicating inventory efficiency. | 30–90 days (industry-specific) | |
| Days Payable Outstanding (DPO) | (Average Accounts Payable / Cost of Goods Sold) * 365 | Shows average days to pay suppliers, reflecting payment terms management. | 30–60 days | |
| Solvency | Debt-to-Equity Ratio | Total Liabilities / Shareholders’ Equity | Assesses financial leverage and reliance on debt financing. | 0.5–2.0 (industry-specific) |
| Debt-to-Assets Ratio | Total Liabilities / Total Assets | Measures proportion of assets financed by debt, indicating financial risk. | <0.5 | |
| Interest Coverage Ratio | EBIT / Interest Expense | Evaluates ability to cover interest payments with operating profits. | >3.0 | |
| Debt Service Coverage Ratio | (Net Operating Income / Total Debt Service) | Assesses ability to cover debt payments (principal + interest) with operating income. | >1.5 | |
| Leverage Ratio | Total Debt / EBITDA | Measures debt levels relative to earnings, indicating debt repayment capacity. | <3.0 | |
| Market | Price-to-Earnings (P/E) Ratio | Market Price per Share / Earnings per Share | Assesses market expectations of future earnings; high ratio suggests growth expectations. | 15–25 (industry-specific) |
| Price-to-Book (P/B) Ratio | Market Price per Share / Book Value per Share | Compares market value to book value, indicating investor perception of intrinsic value. | 1–3 (industry-specific) | |
| Dividend Payout Ratio | (Dividends per Share / Earnings per Share) * 100 | Measures portion of earnings paid as dividends, reflecting dividend sustainability. | 30–50% | |
| Earnings per Share (EPS) | (Net Income – Preferred Dividends) / Weighted Average Shares Outstanding | Indicates profitability per share, a key driver of stock price. | Positive, growth over time | |
| Dividend Yield | (Annual Dividends per Share / Market Price per Share) * 100 | Shows dividend return relative to stock price, appealing to income-focused investors. | 2–5% (industry-specific) |
Notes:
- Industry-Specific Benchmarks: Ideal ratios vary significantly by industry. For example, retail may have higher inventory turnover, while utilities may have higher debt-to-equity ratios.
- Context Matters: Ratios should be compared to historical performance, competitors, and industry averages for meaningful insights.
- Frequency of Review: Liquidity and efficiency ratios may require monthly monitoring, while profitability and solvency ratios are often reviewed quarterly or annually.
- Data Sources: Financial statements (balance sheet, income statement, cash flow statement) are required to calculate these ratios.
This table provides a comprehensive framework for CEOs and CFOs to monitor financial performance and make informed strategic decisions.