There are a number of accepted ratio calculations commonly used in business by researchers doing financial risk analysis or forecasting and which may be applied to a business entity of any size. Think of them as "standard tools of the trade" used in internal operational analysis or in comparison to peer competition. Texts in finance or accounting as well as our library business references sources cover ratio analysis with more insight.
While there are many, here are a few examples of specific ratios using financial data and likely encountered.
Quick Ratio.
Calculation: Cash + Accounts Receivable [Divided by] Current Liabilities
Interpretation: Considered an "acid test" for liquidity & protector to creditors. Current liabilities are all liabilities falling due within one year. The ratio's value reveals protection to short-term creditors in cash or near-cash assets expected. It shows the number of dollars of liquid assets available to cover each dollar of current debt. Ratio of 1 to 1 (1.0) means a business is in a liquid condition, meeting obligations in timely and assured manner. The larger the ratio the greater is liquidity, and indicator of being able to meet near-term obligations. A ratio value less than 1 to 1 is cause for concern, implying depending on using inventory convertibility or other "less" current assets to cover/liquidate short-term debt. Not a healthy, on-going way to do business.
(Source: D&B's Industry Norms & Key Business Ratios. {Book} + author commentary.)
Return on Sales (also termed Profit Margin).
Calculation: Net Profit After Taxes [Divided By] Annual Net Sales
Interpretation: An indicator intended to gauge a business or industry's financial health; its the relationship between "adjusted" profit and sales. This measure reveals the profits earned per dollar of sales realized and therefore is an indicator of efficiency of the operation. The "return" must be adequate for the firm to be able to achieve satisfactory profits for it owners. Also, the ratio is an indicator of a firm's ability to withstand adverse external conditions/risks such as falling prices, rising costs and declining sales. Aside of operational efficiency, this is a telling indicator about pricing policies, and a responsive, reactive ablility to be competitive in changing market conditions.
(Source: D&B's Industry Norms & Key Business Ratios. {Book} + author commentary.)
Price to Earnings Ratio.
Calculation: Company's Share Stock Trading Price [Divided By] Net, after-tax income earned per share
Interpretation: Commonly termed P/E Ratio, this indicator is a measures assessing a firm's value performance and its perceived value to investors. "Price" refers to stock share price of a firm. "Earnings" portion is after-tax net income earned per share of stock outstanding. The ratio value is derived when the two numbers are divided. Example, a stock sells at $26 per share. A firm reports a calculated earning of $1.40 per share; the P/E ratio is a rounded 19. That value is 19 time higher than earning value or investors, for whatever reasons of perceived value, speculation or enthusiasm, are willing to pay as much as $26 to realize $1.40 in earnings, subjective perceptions abound. By all measures, a strong company and with solid stock performance may be "undervalued" and thus have a relatively low P/Es.
Return on Assets.
Calculation: Net Income (after taxes) [Divided By] Total Assets
Interpretation: This ratio is a key indicator of firm's profitability, matching income with underlying assets available to earn a return. A high ROA indicates efficient management & operational procedures using assets; a low ROA indicates inefficient policies, practices, or procedures. Caution when interpreting ROA as this value may be affected by unusual incurred expenses or depreciation.