Essential Financial Ratios: The Owner's Dashboard

Quick answer. Four families of financial ratios are enough to diagnose a company: profitability (net margin, EBE margin, ROE), financial structure and solvency (financial autonomy, gearing, debt repayment capacity), liquidity (current ratio, net cash position) and activity (DSO, DPO, inventory turnover). Read as a trend and benchmarked against your sector, they guide your decisions.

You read your accounts once a year, at year-end, and your accountant tells you whether you made a profit or a loss. That is useful, but not enough to steer a business. A positive result can hide tightening cash, runaway debt or customers who pay later and later. Financial ratios exist precisely for this: turning raw figures into readable management signals that are comparable from one year to the next and from one company to another.

This guide gives you the essential financial ratios to know, their formulas, and above all how to read them without falling into the trap of the isolated number. It complements our article on the 5 financial management KPIs for an SME, which covers day-to-day operational indicators: here, we focus on structural diagnosis built from the balance sheet and income statement.

An operational KPI measures an action in progress: conversion rate, average basket, occupancy rate, customer acquisition cost. It is tracked weekly or monthly and feeds tactical decisions. A financial ratio is calculated from the accounting statements, the income statement and the balance sheet, and provides a snapshot of the company's health: profitability, financing balance, ability to meet its deadlines.

The two are complementary. The KPI tells you whether activity is turning; the ratio tells you whether the model is viable and financeable. An owner who only watches commercial KPIs may run a company that sells well and bleeds cash. An owner who only watches the annual result discovers problems too late. The right reflex is to hold both levels, which we structure within our financial management and steering engagements.

Ratios are traditionally grouped into four families. Each answers a simple question that every owner, banker and investor asks.

1. Profitability: what you really keep#

Profitability measures the activity's ability to generate a result. Three ratios are enough to begin.

• Net margin = net income / revenue. The share of each euro of revenue left after all charges, including taxes and financial costs. It includes non-recurring items, so it must be read with caution.
• EBE margin = gross operating surplus / revenue. More revealing of pure operating performance, since the EBE is calculated before depreciation, financial costs and taxes. According to INSEE, the gross operating surplus equals value added less employee compensation and other taxes on production, plus operating subsidies.
• Return on equity (ROE) = net income / equity. It measures the return on the money tied up by the partners. This is the ratio investors look at first.

Our reading. In the files we handle, the pair to watch is not net margin alone but the EBE margin against the trend in revenue. A company growing fast with an eroding EBE margin is financing growth out of its profitability: sooner or later, cash calls it to order.

2. Financial structure and solvency: who finances what#

This family answers the banker's question: does the company stand on its own funds or on debt?

• Financial autonomy = equity / total liabilities. The higher it is, the less the company depends on its creditors.
• Gearing = net financial debt / equity. It compares the weight of debt to that of equity.
• Debt repayment capacity = net financial debt / self-financing capacity (CAF). It expresses, in years, the time it would take to repay debt with the CAF generated. Banks often use as a benchmark a repayment capacity below 3 to 4 years. This benchmark is indicative, not a legal standard.

Hayot Expertise advice. Before any financing request, calculate your repayment capacity as a credit analyst would. If it exceeds the 3 to 4 year benchmark, prepare the argument: recent growth investment, recovering CAF, or debt already partly amortized. You thereby regain control of how the file is read. Our borrowing capacity simulator based on CAF gives a first order of magnitude.

3. Liquidity: can you pay tomorrow#

Profitability is one thing; the ability to meet deadlines is another. Many profitable companies fail for lack of cash.

• Current ratio = current assets / short-term liabilities. Above 1, current assets cover liabilities due within a year; below, the company depends on future receipts to hold on.
• Net cash position = net working capital less working capital requirement (WCR). The balance genuinely available once the operating cycle is financed. Our WCR and cash simulator helps visualize this mechanism.

To connect these ratios to real flows, also read our method to read the cash flow statement and decide: the ratio gives the position, the flow statement explains the movement.

4. Activity: how fast the money comes back#

Activity ratios measure the turnover of the operating cycle. They often explain, on their own, why a profitable company lacks cash.

• DSO (Days Sales Outstanding): average customer payment delay. The longer it stretches, the more you finance your customers for free.
• DPO (Days Payable Outstanding): average supplier payment delay. A controlled DPO eases the WCR without harming the supplier relationship.
• Inventory turnover: the speed at which stock converts into sales. Slow-turning stock ties up cash and exposes you to obsolescence risk.

DSO is improved concretely by reading the customer ledger and following up; see our article on the cash conversion cycle of DSO, DPO and DIO.

A ratio is never read alone. Three reflexes avoid the most common interpretation errors.

1. Read the trend. An isolated ratio says almost nothing. Three consecutive financial years reveal a trajectory: an EBE margin of 8 percent can be good or bad news depending on whether it is rising or falling.
2. Benchmark against the sector. A margin that is normal in distribution would be alarming in consulting, and vice versa. The Banque de France publishes, by sector, around thirty ratios for activity, profitability and financial balance, drawn from the FIBEN database. Its rating relies on axes of solvency, financial autonomy, liquidity and result. These sector booklets provide a reliable point of comparison.
3. Cross the families. A good liquidity ratio with falling profitability, or strong profitability with runaway debt, should trigger analysis. Diagnosis is born from the crossing, not from a ratio taken in isolation.

A few situations call for adapted reading, otherwise conclusions are distorted.

• Young company or startup. Equity can be low or negative after an investment phase, making ROE and financial autonomy uninformative. The focus then shifts to the WCR, the break-even point and the cash runway.
• Holding and asset-holding company. Operating ratios lose their meaning: the key reads at consolidated level and in dividend upstreaming, not in the holding's standalone income statement.
• Seasonal activity. A ratio calculated at year-end can differ greatly from the annual average. A rolling thirteen-week cash view is more reliable than a snapshot on 31 December.
• Use of leasing or rental. Part of the financing does not appear as debt on the balance sheet, which optically improves gearing. Restatement is needed to compare two companies on equal footing.

The underestimated risk. Comparing your ratios to a general benchmark found online rather than to your own sector. We have seen an owner worry about a net margin judged low, when it sat in the upper range of their distribution activity: the right reference was not a universal standard, but the corresponding sector booklet.

There is no need to track thirty ratios. A useful dashboard keeps a few, at least one per family, updated at each closing and ideally at each interim situation.

1. Retrieve the balance sheet and income statement for the last three financial years.
2. Calculate one ratio per family: EBE margin, repayment capacity, current ratio, DSO.
3. Plot each ratio over three years to visualize the trend.
4. Position yourself against your sector using Banque de France data.
5. Identify the ratio deteriorating fastest: that is your action priority.

2026 points of attention. Self-financing capacity remains the indicator financiers watch most. In a context of more selective credit, ensure consistency between your CAF, your repayment capacity and your financing plan. A file where these three elements fit together passes more easily, which we prepare in our forecast balance sheet and outsourced financial direction engagements.