Ratio Analysis: Current, Quick, Debt-Equity, ROE With Comparison Table

Ratio analysis converts raw financial statement numbers into standardized metrics that allow comparison across companies and time periods. A $50M company and a $5B company have very different absolute numbers but can be directly compared on margin percentages, return on equity, and turnover metrics. Ratios fall into four categories: liquidity (can the company pay its bills?), solvency (can the company survive long-term?), profitability (how much income is generated per dollar of revenue/assets/equity?), and efficiency (how productive is each dollar of assets?). The skill is computing the ratios correctly, comparing against industry benchmarks, and recognizing when ratio differences reflect operational reality vs accounting policy choices. The DuPont framework decomposes return on equity (ROE) into three drivers — operating efficiency, asset utilization, and financial leverage — providing a structured way to diagnose what is driving (or hurting) shareholder returns.

Liquidity ratios measure short-term ability to meet obligations. Current ratio = Current Assets / Current Liabilities. Above 1.0 means current assets exceed current liabilities. Healthy benchmark: 1.5-3.0 in most industries. Below 1.0 is a liquidity warning. Above 3.0 may signal underutilized capital. Quick ratio (acid-test) = (Current Assets − Inventory) / Current Liabilities. Excludes inventory because inventory may not convert quickly to cash. Healthy benchmark: 1.0+. More conservative than current ratio. Cash ratio = (Cash + Marketable Securities) / Current Liabilities. Most conservative; only considers cash-equivalent assets. Healthy benchmark: 0.5+ in most industries; lower in seasonal businesses. Worked Example. Company X: Current Assets $500K (Cash $100K, Securities $50K, Receivables $150K, Inventory $200K). Current Liabilities $300K. Current ratio = $500K / $300K = 1.67 (healthy). Quick ratio = ($500K − $200K) / $300K = 1.00 (acceptable). Cash ratio = ($100K + $50K) / $300K = 0.50 (acceptable for most industries). The pattern (current 1.67, quick 1.00, cash 0.50) is typical for a company with significant inventory. A company with quick ratio at 1.00 but current ratio at 3.0 has too much inventory tying up working capital. Limitation: liquidity ratios can be manipulated through end-of-period payment delays, channel-stuffing receivables, or inventory write-down deferral. Trend analysis over multiple periods is more reliable than a single point.

Solvency ratios measure long-term financial structure and debt-servicing ability. Debt-to-Equity (D/E) = Total Debt / Total Equity. Industry-dependent; manufacturers typically 0.5-1.5; tech companies often <0.3; utilities and REITs often 1.0-3.0+ (high D/E acceptable when revenue is stable). Above 3.0 signals high leverage risk. Debt-to-Assets = Total Debt / Total Assets. The complementary view; equals D/(D+E) ratio. Easier to compare across capital structures. Interest Coverage Ratio = EBIT / Interest Expense. Times interest earned. Healthy benchmark: 3.0+ (some interest cushion); below 1.5 is concerning. Banks lending to companies often require interest coverage covenants. Debt Service Coverage Ratio = (EBIT + Depreciation) / (Interest + Principal Payments). Includes principal repayment in addition to interest. Used for total debt-service capacity. Healthy benchmark: 1.25+ for most companies. Worked Example. Company Y: Total Debt $400K, Total Equity $600K, Total Assets $1,000K. EBIT $150K, Interest Expense $30K. D/E = $400K / $600K = 0.67 (moderate). D/A = $400K / $1,000K = 0.40 (40% debt-financed). Interest Coverage = $150K / $30K = 5.0× (healthy). The combination of moderate D/E + healthy interest coverage indicates a company with manageable leverage. If interest coverage fell to 1.5× while D/E stayed at 0.67, that would signal earnings deterioration is threatening debt service. Limitation: book-value debt and equity may not reflect economic value. Off-balance-sheet liabilities (operating leases pre-ASC 842, asset retirement obligations, pension underfunding) can substantially understate true leverage.

Profitability ratios measure income generation relative to revenue, assets, or equity. Gross Margin = Gross Profit / Revenue = (Revenue − COGS) / Revenue. Industry-dependent: software 70-90%; food retail 25-30%; commodity manufacturing 10-25%. Operating Margin = Operating Income / Revenue. After SG&A and depreciation. Industry: software 20-30%; mature retailer 5-10%; commodity 1-5%. Net Margin = Net Income / Revenue. After interest, taxes, all expenses. Industry: software 15-25%; retail 1-5%; commodity often near zero or negative. Return on Assets (ROA) = Net Income / Total Assets. How efficiently assets generate income. Healthy benchmark varies by industry: capital-intensive 3-8%; asset-light businesses can be 15-25%+. Return on Equity (ROE) = Net Income / Stockholders Equity. The ultimate shareholder-return ratio. Healthy benchmark: 12-20% for mature companies. Above 25% may signal high leverage rather than operational excellence. Worked Example. Company Z: Revenue $1,000K, COGS $400K, Operating Expenses $300K, Interest Expense $50K, Tax Expense $60K, Net Income $190K. Total Assets $1,500K, Equity $900K. Gross Margin = ($1,000K − $400K) / $1,000K = 60%. Operating Margin = ($1,000K − $400K − $300K) / $1,000K = 30%. Net Margin = $190K / $1,000K = 19%. ROA = $190K / $1,500K = 12.7%. ROE = $190K / $900K = 21.1%. The combination (60% gross / 30% operating / 19% net / 21% ROE) is consistent with a software-like profitable business. A commodity manufacturer would show 25% gross, 5% operating, 2% net, 5% ROE. Limitation: revenue-based margins are sensitive to revenue recognition policy and pricing. A company that "stuffs the channel" inflates revenue and depresses margins. ROE can be manipulated through stock buybacks (reduces equity, raises ROE).

Efficiency ratios measure how productively a company uses its assets. Asset Turnover = Revenue / Total Assets. How much revenue per dollar of assets. Industry-dependent: capital-intensive 0.5; retail 2.0; software-as-a-service often 1.0+. Inventory Turnover = COGS / Inventory. How many times inventory is sold per year. Industry: grocery 12-30×; auto parts 3-5×; luxury goods 1-3×. Receivables Turnover = Revenue / Accounts Receivable. How quickly sales convert to cash. Days Sales Outstanding (DSO) = 365 / Receivables Turnover. Payables Turnover = COGS / Accounts Payable. How quickly the company pays suppliers. Days Payables Outstanding (DPO) = 365 / Payables Turnover. Cash Conversion Cycle = DSO + DIO − DPO, where DIO = 365 / Inventory Turnover. Days from cash outflow to cash inflow; lower is better. DuPont Decomposition. ROE = Net Margin × Asset Turnover × Equity Multiplier. • Net Margin (Net Income / Revenue) — operational efficiency • Asset Turnover (Revenue / Total Assets) — asset utilization • Equity Multiplier (Total Assets / Equity) — financial leverage (= 1 / (1 − D/A)) ROE of 20% can come from very different combinations: • High-margin, low-turnover, low-leverage business (software): 20% × 0.8 × 1.25 = 20% • Low-margin, high-turnover, low-leverage business (retail): 5% × 3.0 × 1.33 = 20% • Moderate-margin, moderate-turnover, high-leverage business (bank): 8% × 0.5 × 5.0 = 20% All three deliver ROE = 20% but the operational and risk profiles are completely different. DuPont diagnoses what is driving ROE. Worked Example with comparable analysis. Five companies in the same industry, hypothetical: | Company | Net Margin | Asset Turnover | Equity Multiplier | ROE | |---|---:|---:|---:|---:| | A | 12% | 1.2 | 1.5 | 21.6% | | B | 10% | 1.5 | 1.4 | 21.0% | | C | 15% | 0.8 | 2.0 | 24.0% | | D | 8% | 1.8 | 1.3 | 18.7% | | E | 11% | 1.0 | 2.5 | 27.5% | The industry shows ROE clustering 19-28%. Company E has highest ROE but lowest margin and highest leverage — leverage-driven ROE that is more fragile than the operations-driven ROE of companies A and B. Company D has the highest asset turnover (most efficient asset use) but lower margins. Company C has the highest margin but lowest asset turnover (boutique premium pricing). DuPont diagnosis is what makes these comparisons meaningful.

Ratio analysis problems span every accounting and finance curriculum, the CPA FAR section, and the early years of every analyst job. Snap a photo of any income statement and balance sheet (or both) and AccountingIQ computes all four categories of ratios, compares against typical industry benchmarks, and produces the DuPont decomposition for ROE. For multi-company comparisons, AccountingIQ produces side-by-side ratio tables and identifies which ratios deviate most from peers. This content is for educational purposes only and does not constitute investment or accounting advice.