Financial ratio analysis: the nine ratios investors actually check

Why ratios beat raw totals

A profit figure on its own says nothing about whether a business is efficient, solvent or investable. Ratios turn the same ledger balances into comparisons: profit against sales, debt against equity, returns against the capital tied up in the business.

The nine core ratios

1. **Gross profit margin** — (revenue minus cost of sales) divided by revenue. Shows pricing power and direct cost control.
2. **Operating profit margin** — operating profit divided by revenue. Strips out financing and shows how the trading operation performs.
3. **Net profit margin** — net profit divided by revenue. What is left for owners after everything.
4. **Expense ratio** — total costs divided by revenue. A quick read on overhead discipline.
5. **ROCE** — operating profit divided by capital employed. The headline return measure for investors.
6. **Debt ratio** — total liabilities divided by total assets. How much of the business is funded by others.
7. **Debt-to-equity** — total liabilities divided by shareholders equity. Gearing, and therefore risk.
8. **Interest cover** — operating profit divided by interest expense. How comfortably borrowings are serviced.
9. **Asset turnover** — revenue divided by total assets. How hard the asset base works.

Reading them together

No ratio is meaningful alone. A high net margin with weak asset turnover often signals a capital-heavy model. Strong ROCE alongside high gearing means the return is borrowed, not earned. Always look at profitability, gearing and efficiency as a set, then compare against the prior period and the sector.

Where the numbers must come from

Every ratio should trace back to a posted ledger balance, not to a spreadsheet estimate. If cost of sales is not separated from overheads, gross margin is not a real number. If no balance sheet exists, ROCE and asset turnover cannot be calculated at all, and reporting them anyway is a fabrication.

How NanoFora handles this

NanoFora computes all nine from the posted double-entry ledger, shows the formula and the exact figures used, and marks a ratio as not calculable with the reason when the underlying accounts carry no balance. Read the related pieces on ROCE and profit margins, or see AI financial analysis.