Financial Glossary
Accounting Ratios
Accounting ratios are calculations that relate one financial statement figure to another to measure a business's liquidity, profitability, leverage, or operating efficiency. Common categories include liquidity ratios such as the current and quick ratios, profitability ratios such as gross and net margin, leverage ratios such as debt-to-equity, and efficiency ratios such as inventory turnover. They let owners and lenders compare performance across periods and against peers regardless of company size.
Problem & Application
An owner-operated business that only watches its bank balance misses the signals ratios reveal, like a current ratio slipping toward a cash crunch or a margin compressing as costs creep up. For hospitality and real estate operators, a focused set of ratios turns dense statements into a few numbers they can track monthly and explain to a lender. Knowing which ratios matter for the business model keeps the list practical instead of overwhelming.
In Short
Accounting ratios distill financial statements into a handful of metrics that flag strengths and risks before they show up in the bank account.