Profitability
Margins relate a profit measure to revenue. Keep gross, operating and net profit distinct; each describes a different stage of the income statement.
Operating margin = operating profit ÷ revenue × 100
Financial ratio analysis
See the relationship behind the ratio.
Understand financial ratios by starting with the question, checking the inputs and showing the calculation. Explore profitability and liquidity with an interactive calculator and practical reporting checks.
A practical guide · Apply it to your next companyOperating profit ÷ revenue × 100
Calculated from your inputs. Keep the entity, period and accounting basis consistent.
Initial example: Dyson Limited · 2024 · individual company.
Defaults use a saved Dyson Limited 2024 record in GBP millions. Edit the inputs to explore the arithmetic. Results are calculated here, not live company data or a business-quality score.
Formulas and inputs made visibleEditable calculation examplesInterpretation with reporting context
Choose the measure that fits the question.
Liquidity
Compare available short-term assets with short-term liabilities. The result needs context about the timing and nature of those assets and obligations.
Current ratio = current assets ÷ current liabilities
Capital and returns
Return and leverage measures connect earnings, assets, debt or equity. Definitions and the use of average versus closing balances can change the answer.
Ask which debt, earnings and equity definitions are being used.
INTERPRET THE BASIS, TOO
The same number can tell different stories.
A financial ratio is a relationship between selected inputs. It becomes useful when you understand the business model, reporting period and definitions behind those inputs.
Compare consistently
Use compatible measures and accounting scopes. Do not mix adjusted earnings with statutory earnings without explaining the difference.
Respect the denominator
Zero makes a division undefined. Very small or negative denominators can make a result difficult to interpret; show the inputs rather than hiding the issue.
Avoid universal thresholds
A ratio that is typical in one business model may be unusual in another. Consider historical patterns, relevant peers and the underlying accounts.
A REPEATABLE METHOD
Make the arithmetic easy to check.
- 01
Define the question
Decide whether you are examining margins, short-term financial position, returns or leverage.
- 02
Match the inputs
Use the same entity, currency and reporting basis. Check whether a formula needs average balances.
- 03
Calculate and explain
Show the formula, result and qualifications, then investigate what drove the change.
TRY THIS QUESTION
Analyse available profitability and liquidity ratios for Dyson Limited, United Kingdom, company number 02627406. Show the formulas, inputs, reporting periods and accounting scope. Explain missing inputs and avoid assuming universal good or bad thresholds.
YOUR QUESTIONS
Your questions, answered.
Ten answers about financial ratio analysis.
Financial ratio analysis examines relationships between financial figures to understand aspects of performance or position. Common categories include profitability, liquidity, leverage and returns. The inputs and their definitions are as important as the resulting number.
Start with the question. Margins help examine profitability; liquidity ratios relate short-term assets and obligations; return and leverage measures explore capital use and financing. No single set is the best fit for every company or task.
Divide operating profit by revenue for the same entity and period, then multiply by 100. In the saved example, £7.5m divided by £305m gives approximately 2.46%. The calculator shows the arithmetic and allows you to change the inputs.
The current ratio divides current assets by current liabilities at the same reporting date. It compares two balance-sheet amounts; it does not show the timing of every payment or guarantee the ability to meet obligations.
Working capital is an amount, not a ratio: current assets minus current liabilities. The calculator includes it beside liquidity analysis because it uses the same inputs but answers a different question.
There is no universal threshold that works across all companies and industries. Interpret the definition, business model, reporting history and relevant peers before judging the result.
A ratio cannot be calculated with a zero denominator, and missing inputs should not be replaced with zero. This calculator asks for valid inputs instead of displaying an infinite result or inventing a number.
Yes, when the figures use compatible definitions, periods and accounting scopes. Check group versus standalone accounts and any adjusted measures. A percentage alone does not remove these differences.
Some formulas use a period-average balance, while others use the balance at a particular date. Return and turnover measures can change depending on that choice. State the formula and balance convention used.
You can ask for ratios where the necessary financial inputs are available. Request the formula, input values, dates and source context. Limited private-company disclosure can prevent some calculations.
Further readingSEC: financial statements and calculations
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