Financial Glossary
Financial Ratios
Financial ratios are calculations that relate one figure from a company's financial statements to another to reveal liquidity, profitability, leverage, or efficiency. Each ratio is computed by dividing one line item by another, such as current assets divided by current liabilities for the current ratio. Ratios turn raw statement numbers into comparable signals that can be tracked over time and benchmarked against peers.
Problem & Application
For owner-operated businesses, a single dollar figure rarely tells the full story; ratios are what make a balance sheet and income statement actionable. A campground operator can use occupancy-adjusted margin and debt service coverage to decide whether to take on a new loan, while an STR investor can watch liquidity ratios to avoid a cash crunch in the off-season. The key is calculating the same ratios consistently so trends, not one-off numbers, drive decisions.
In Short
Financial ratios convert statement data into a clear read on solvency, profitability, and efficiency that supports better operating and financing decisions.