Reviewed by Jan 05, 2021| Updated on
Financial ratios are relationships determined from a company's financial information and used for comparison purposes. Examples include return on investment (ROI), return on assets (ROA), and debt-to-equity. These ratios are the result of dividing one account balance or financial measurement with another.
Financial ratios can provide small business owners and managers with a valuable tool with which to measure their progress against predetermined internal goals, a certain competitor, or the overall industry. In addition, tracking various ratios over time is a powerful means of identifying trends in their early stages. Ratios are also used by bankers, investors, and business analysts to assess a company's financial status.
Financial ratios can be an important tool for small business owners and managers to measure their progress toward reaching company goals, as well as toward competing with larger companies. Ratio analysis, when performed regularly over time, can also help small businesses recognize and adapt to trends affecting their operations.
Yet another reason small business owners need to understand financial ratios is that they provide one of the main measures of a company's success from the perspective of bankers, investors, and business analysts.