Key Financial Ratios Every Business Owner Should Know
The financial ratios that reveal whether your business is healthy — gross margin, current ratio, quick ratio, debt-to-equity, and more — explained in plain English.
Profitability ratios
Gross Margin % = Gross Profit ÷ Revenue × 100
The most fundamental ratio — what % of every £1 of revenue is retained after paying for the product itself. Industry benchmarks vary widely: 10–15% for electronics; 30–50% for apparel; 60–80% for SaaS.
Net Profit Margin % = Net Profit ÷ Revenue × 100
What % of every £1 of revenue flows through to profit after all costs. A ratio below 5% leaves little room for error; above 15% is strong for most product businesses.
Return on Investment (ROI) = Net Profit ÷ Total Investment × 100
Useful for evaluating specific initiatives (a marketing campaign, a new product line, a warehouse investment) rather than the whole business.
View all profitability ratios in Finance → Ratios → Profitability.
Liquidity ratios
Current Ratio = Current Assets ÷ Current Liabilities
Measures your ability to pay short-term obligations. A ratio above 1.5 is healthy; below 1.0 means your short-term liabilities exceed your liquid assets — a warning sign.
Current Assets = Cash + Debtors + Stock
Current Liabilities = Creditors due within 12 months + Short-term debt
Quick Ratio (Acid Test) = (Current Assets − Stock) ÷ Current Liabilities
A stricter version of the current ratio that excludes stock (which may not be quickly convertible to cash). A quick ratio above 1.0 is generally healthy. Below 0.8 suggests potential short-term liquidity risk, especially if you hold significant stock that is slow-moving.
View liquidity ratios in Finance → Ratios → Liquidity.
Efficiency ratios
Inventory Turnover = COGS ÷ Average Inventory Value
How many times you sell through your inventory in a year. Higher is better (you are converting stock to cash quickly). Typical benchmarks: 6–12× for fast-moving eCommerce; 2–4× for slower-moving home goods.
Debtor Days (DSO) = (Debtors ÷ Annual Revenue) × 365
Average days to collect payment from customers. Lower is better for cash flow.
Creditor Days = (Creditors ÷ Annual COGS) × 365
Average days you take to pay suppliers. Higher is better for your cash position (you are funded by suppliers).
Asset Turnover = Revenue ÷ Total Assets
How efficiently you use your assets to generate revenue. Higher is better — a ratio of 2× means you generate £2 of revenue for every £1 of assets.
View efficiency ratios in Finance → Ratios → Efficiency.
Using ratios as early warning signals
Financial ratios are most powerful when tracked over time — a single ratio snapshot is less useful than a trend. AskBiz plots your key ratios on rolling 12-month charts so you can see whether they are improving or deteriorating.
Warning signs to watch for:
- Gross margin declining over 3+ consecutive months → cost increase or pricing pressure
- Current ratio falling below 1.2 → liquidity tightening
- Inventory turnover declining → stock accumulating, cash tied up
- Debtor days increasing → customers paying slower, cash flow impact growing
Set threshold alerts in Intelligence → Alerts → Financial Ratio Alerts to be notified automatically when any ratio moves outside your defined range.