Five ratios that say a lot
A ratio turns two numbers from the report into one you can compare across years and companies.
Profit margin
Profit divided by sales. A café selling €100,000 a year and keeping €15,000 has a margin of 15%. Rising margins mean each sale keeps more; falling ones can mean rising costs or tougher rivals.
Return on equity
Profit divided by the owners’ equity. €15,000 of profit on €75,000 of equity is 20%. It shows how well the owners’ money is used, but borrowing can push it up, so read it next to debt.
Debt to equity
What the company owes divided by equity. €50,000 of debt on €75,000 of equity is about 0.7. Higher means more borrowed; fine for steady businesses, risky for ones whose sales jump around.
Cash from profit
Cash from running the business divided by profit. Close to 1 or above means profit turns into money. A company that reports profit year after year but little cash deserves a closer look.
Compare like with like
A supermarket and a software firm have very different normal margins. Compare a company with its own past and with others in its industry, never with a single “good” number.
Key takeaways
- Margins: how much of each sale is kept.
- Return on equity: how well owners’ money works, read next to debt.
- Profit should turn into cash.