Key Financial Ratios

Canonical data and convention. Figures tie to Wexford Instruments (USD millions). Per the Pillar 24 hub, return measures use average balances and working-capital days use closing balances. The lines these ratios are built from are explained in Pillar 24 and are linked rather than re-explained.

Revenue of 1,000 and revenue of 50,000 say nothing about which business is better run; margins of 10% and 4% begin to. That is the whole value, and it is also the whole limitation — a ratio discards scale, and scale is sometimes the thing that mattered.

Four families

Profitability — how much of what comes in stays. Gross, operating, and net margins, plus return on equity and return on assets. Efficiency — how hard the assets work. Asset turnover, inventory turnover, days sales outstanding. Liquidity — whether short-term obligations can be met. Current, quick, and cash ratios. Leverage — how much of the business is financed with borrowed money, and how comfortably it is serviced. Debt to equity, net debt to EBITDA, interest coverage.

The families are not independent, and that is the point of the next section. A company can raise return on equity by improving margins, by using its assets harder, or by borrowing more — three completely different things that arrive at the same number.

The DuPont decomposition

This is the one ratio construction that genuinely illuminates rather than summarises. Return on equity breaks into three factors that multiply together:

Net margin × asset turnover × equity multiplier = return on equity.

Margin is what the business earns on what it sells. Turnover is how much it sells per unit of assets. The multiplier is how much of those assets are funded by other people's money. A luxury goods company and a supermarket can post the same return on equity through completely opposite routes — high margin and low turnover against the reverse. And a company can raise return on equity purely by borrowing more, with no operational improvement whatever, which is why the headline figure is nearly uninterpretable without the decomposition.

Five things ratios cannot do

They cannot travel across industries. A current ratio of 1.1 is unremarkable in one sector and alarming in another; margins vary by business model far more than by management skill.

They inherit every accounting choice underneath them. Inventory method alone moves gross margin by nearly seven percentage points and inventory turnover by 31% on identical economics — so a ratio comparison across different accounting is a comparison of conventions.

They cannot see a single year for what it is. One period is noise; the direction over several is the information.

They can be improved without improving anything. Leverage lifts return on equity. Selling assets lifts turnover. Delaying payments lifts liquidity measures briefly.

And there are no correct values. This portal publishes no target for any ratio, because the appropriate level depends on the business, the industry, and the moment.