Financial Ratios Explained

A financial ratio divides one figure from your financial statements by another, so you can compare numbers of very different sizes and read the direction of your business at a glance. 2diff Business Silver by 2diff.io calculates 23 of them from the profit and loss statement and balance sheet in your QuickBooks^® Online reports. Here is each one: the formula in words, what it measures, which statement it reads, and a worked example.

By Matthew Dettman, ChFC, CLU, founder of Second Difference Solutions. Updated October 2026.

What is a financial ratio?

A financial ratio divides one figure from your financial statements by another, so numbers of very different sizes can be compared. A net income figure says little on its own; net income as a share of revenue says how much of each sale the business kept. A ratio read once is a snapshot. Read year after year, it shows a direction.

This page explains how each ratio is calculated and what it measures. It is analysis, not financial advice, and it gives no target or typical range for any ratio, because what is usual differs by industry, size and season.

How are the 23 ratios grouped?

2diff Business groups its ratios into four categories, and this page follows them.

Profitability ratios (6)
Asset utilization ratios (6)
Liquidity ratios (6)
DuPont ratios (5)

Where do the example numbers come from?

Every example below uses the 2025 reports of a fictional landscaping company, the sample company in the free 2diff Business demo. It is a fictional sample company, not a real business. 2025 is a full year, and revenue growth compares it with 2024. Ratios that use a balance sheet figure use the year-end balance, not an average of the opening and closing balances, so for a company whose balances grew during the year, returns read lower and collection periods longer than an average would give. This company books depreciation below operating income, under other expenses, so its operating income is close to earnings before depreciation. Each ratio is worked from the unrounded figures and shown rounded, so a sum or product of the rounded figures can differ in the last digit.

Example inputs for a fictional landscaping company
Figure	Statement	Amount
Revenue (total income), 2025	Profit and loss	$221,243
Revenue (total income), 2024	Profit and loss	$115,050
Cost of goods sold	Profit and loss	$83,401
Gross profit	Profit and loss	$137,842
Total expenses	Profit and loss	$36,102
Operating income (net operating income)	Profit and loss	$101,739
Interest expense	Profit and loss	$3,120
Net income	Profit and loss	$81,765
Total current assets	Balance sheet	$291,160
Accounts receivable	Balance sheet	$60,547
Inventory	Balance sheet	$10,749
Total fixed assets	Balance sheet	$53,915
Total assets	Balance sheet	$345,075
Accounts payable	Balance sheet	$23,021
Credit cards	Balance sheet	$17,462
Total current liabilities	Balance sheet	$46,319
Long-term liabilities	Balance sheet	$71,184
Total equity	Balance sheet	$227,572

Profitability ratios

How much of its revenue the business keeps at each level of the profit and loss statement, and how that profit compares with what the business owns and what the owners have put in.

Revenue Growth

Formula: This period's revenue minus the prior period's revenue, divided by the prior period's revenue (taken as a positive number).
What it measures: How fast sales rose or fell from one period to the next. A negative figure means revenue shrank.
Statement: Profit and loss. Shown as: percent.
Example (a fictional landscaping company, 2025): $221,243 revenue in 2025 minus $115,050 in 2024, divided by $115,050 = 92.3%.

Gross Margin

Formula: Gross profit divided by revenue, where gross profit is revenue minus cost of goods sold.
What it measures: The share of revenue left after paying for the materials and direct labor that went into the work.
Statement: Profit and loss. Shown as: percent.
Example (a fictional landscaping company, 2025): $137,842 gross profit divided by $221,243 revenue = 62.3%.

Operating Margin

Formula: Operating income divided by revenue.
What it measures: The share of revenue left after cost of goods sold and the running costs of the business, such as rent, fuel and insurance, before interest and other non-operating items.
Statement: Profit and loss. Shown as: percent.
Example (a fictional landscaping company, 2025): $101,739 operating income divided by $221,243 revenue = 46.0%.

Net Profit Margin

Formula: Net income divided by revenue.
What it measures: The share of revenue that remains as profit after every expense on the profit and loss statement, including interest, depreciation and taxes.
Statement: Profit and loss. Shown as: percent.
Example (a fictional landscaping company, 2025): $81,765 net income divided by $221,243 revenue = 37.0%.

ROA (return on assets)

Formula: Net income divided by total assets.
What it measures: How much profit the business earned relative to everything it owns, from cash and receivables to trucks and equipment.
Statement: Profit and loss and balance sheet. Shown as: percent.
Example (a fictional landscaping company, 2025): $81,765 net income divided by $345,075 total assets = 23.7%.

ROE (return on equity)

Formula: Net income divided by total equity. The app leaves it blank when equity is zero or negative.
What it measures: How much profit the business earned relative to the owners' stake in it, as the balance sheet records that stake.
Statement: Profit and loss and balance sheet. Shown as: percent.
Example (a fictional landscaping company, 2025): $81,765 net income divided by $227,572 total equity = 35.9%.

Asset utilization ratios

How hard the assets on the balance sheet work to produce sales, and how many days money sits in receivables, inventory and unpaid bills.

Total Asset Turnover

Formula: Revenue divided by total assets.
What it measures: How much revenue the business produced relative to its total assets. It is shown as a multiple, so 2.00 means sales were twice total assets.
Statement: Profit and loss and balance sheet. Shown as: multiple.
Example (a fictional landscaping company, 2025): $221,243 revenue divided by $345,075 total assets = 0.64.

Fixed Asset Turnover

Formula: Revenue divided by total fixed assets as the balance sheet reports them.
What it measures: How much revenue the business produced relative to its vehicles, equipment, buildings and other long-lived assets.
Statement: Profit and loss and balance sheet. Shown as: multiple.
Example (a fictional landscaping company, 2025): $221,243 revenue divided by $53,915 total fixed assets = 4.10.

A/R Collection Period

Formula: Accounts receivable divided by total revenue, multiplied by 365.
What it measures: Roughly how many days of sales are still owed by customers at the balance sheet date. It is also called days sales outstanding (DSO).
Statement: Profit and loss and balance sheet. Shown as: days.
Example (a fictional landscaping company, 2025): $60,547 accounts receivable divided by $221,243 revenue, times 365 = 100 days.

Inventory Days on Hand

Formula: Inventory divided by cost of goods sold, multiplied by 365. The app leaves it blank when there is no inventory or no cost of goods sold.
What it measures: Roughly how many days the stock on hand would last at the year's pace of cost of goods sold.
Statement: Profit and loss and balance sheet. Shown as: days.
Example (a fictional landscaping company, 2025): $10,749 inventory divided by $83,401 cost of goods sold, times 365 = 47 days.

Accounts Payable Period

Formula: Accounts payable divided by cost of goods sold, multiplied by 365. A business with no cost of goods sold uses total expenses instead, which makes the figure an approximation. The app leaves it blank when accounts payable is zero.
What it measures: Roughly how long the business waits before paying supplier bills, with cost of goods sold standing in for what it buys in a year.
Statement: Profit and loss and balance sheet. Shown as: days.
Example (a fictional landscaping company, 2025): $23,021 accounts payable divided by $83,401 cost of goods sold, times 365 = 101 days.

Cash Operating Cycle

Formula: A/R collection period plus inventory days on hand, minus the accounts payable period.
What it measures: The number of days between paying suppliers and collecting from customers. It is also called the cash conversion cycle. Supplier credit shortens it.
Statement: Profit and loss and balance sheet. Shown as: days.
Example (a fictional landscaping company, 2025): 100 days to collect plus 47 days of inventory, minus 101 days to pay suppliers = 46 days.

Liquidity ratios

Whether short-term assets cover short-term debts, how long the cycle from stock to cash runs, and how the business is financed. The app groups its debt and interest coverage ratios here as well.

Current Ratio

Formula: Total current assets divided by total current liabilities. The app leaves it blank when current liabilities are zero or negative.
What it measures: How many times over the cash, receivables and other short-term assets of the business cover what it owes within a year.
Statement: Balance sheet. Shown as: multiple.
Example (a fictional landscaping company, 2025): $291,160 current assets divided by $46,319 current liabilities = 6.29.

Quick Ratio

Formula: Total current assets minus inventory, divided by total current liabilities. The app leaves it blank when current liabilities are zero or negative.
What it measures: The same comparison as the current ratio with inventory taken out, because stock on the shelf cannot pay a bill until it is sold.
Statement: Balance sheet. Shown as: multiple.
Example (a fictional landscaping company, 2025): $291,160 current assets minus $10,749 inventory, divided by $46,319 current liabilities = 6.05.

Operating Cycle

Formula: A/R collection period plus inventory days on hand.
What it measures: How long money stays tied up between the purchase of stock and the customer paying for the sale, ignoring the time suppliers allow. Subtract the accounts payable period to get the cash operating cycle.
Statement: Profit and loss and balance sheet. Shown as: days.
Example (a fictional landscaping company, 2025): 100 days to collect plus 47 days of inventory = 147 days.

Interest Debt to Equity

Formula: Long-term liabilities plus credit card balances plus any line of credit, divided by total equity. The app leaves it blank when equity is zero or negative.
What it measures: How much interest-bearing borrowing the business carries relative to the owners' stake. Bills owed to suppliers and payroll liabilities are not counted.
Statement: Balance sheet. Shown as: multiple.
Example (a fictional landscaping company, 2025): $71,184 long-term liabilities plus $17,462 credit cards plus $0 line of credit, divided by $227,572 total equity = 0.39.

Financial Leverage

Formula: Total assets divided by total equity. The app leaves it blank when equity is zero or negative.
What it measures: How many times the owners' stake the business holds in assets. Anything above 1.00 is financed by liabilities of some kind.
Statement: Balance sheet. Shown as: multiple.
Example (a fictional landscaping company, 2025): $345,075 total assets divided by $227,572 total equity = 1.52.

Times Interest Earned

Formula: Operating income divided by interest expense. The app leaves it blank when there is no interest expense or the interest figure is negative.
What it measures: How many times over the year's operating income would pay the year's interest.
Statement: Profit and loss. Shown as: multiple.
Example (a fictional landscaping company, 2025): $101,739 operating income divided by $3,120 interest expense = 32.60.

DuPont ratios

The DuPont method splits return on equity into three parts that multiply together: profit margin, asset turnover and financial leverage. Each part is shown on its own so you can see which one moved.

Dupont Net Profit Margin

Formula: Net income divided by revenue, the same calculation as net profit margin.
What it measures: The first of the three DuPont parts: how much of revenue ends as profit.
Statement: Profit and loss. Shown as: percent.
Example (a fictional landscaping company, 2025): $81,765 net income divided by $221,243 revenue = 37.0%.

Dupont Total Asset Turnover

Formula: Revenue divided by total assets, the same calculation as total asset turnover.
What it measures: The second DuPont part: how much revenue the assets produced, as a multiple of total assets.
Statement: Profit and loss and balance sheet. Shown as: multiple.
Example (a fictional landscaping company, 2025): $221,243 revenue divided by $345,075 total assets = 0.64.

Dupont ROA (return on assets)

Formula: Net income divided by total assets, which equals the DuPont net profit margin multiplied by the DuPont total asset turnover.
What it measures: Return on assets, shown inside the DuPont set as margin times turnover.
Statement: Profit and loss and balance sheet. Shown as: percent.
Example (a fictional landscaping company, 2025): 37.0% margin times 0.64 turnover = 23.7%.

Dupont Financial Leverage

Formula: Total assets divided by total equity, the same calculation as financial leverage.
What it measures: The third DuPont part: total assets as a multiple of the owners' stake.
Statement: Balance sheet. Shown as: multiple.
Example (a fictional landscaping company, 2025): $345,075 total assets divided by $227,572 total equity = 1.52.

Dupont ROE (return on equity)

Formula: DuPont net profit margin multiplied by DuPont total asset turnover multiplied by DuPont financial leverage. The app leaves it blank if any of the three is blank.
What it measures: Return on equity rebuilt from its three parts. It matches ROE, and the three parts show whether a change came from margin, turnover or leverage.
Statement: Profit and loss and balance sheet. Shown as: percent.
Example (a fictional landscaping company, 2025): 37.0% margin times 0.64 turnover times 1.52 leverage = 35.9%.

How do you read a ratio without a benchmark?

Start with your own history. A ratio that moves the same way for three years says more than any single reading. Then look at the parts: if return on equity rose, the DuPont ratios show whether margin, turnover or leverage did the work. Finally, read related ratios together, such as the current and quick ratios, or the collection and payable periods, because each one alone can mislead.

For the trade the sample company works in, see the landscaping industry page. If you are an accountant reading these ratios with a client, see 2diff Business for accountants.

2diff Business by 2diff.io also calculates 23 financial ratios, from annual figures you type in, with no accounting software required. See 2diff Business from your own figures.

Financial Ratio Questions

What does a current ratio of 1.5 mean?

A current ratio of 1.5 means a business has $1.50 of current assets for every $1.00 due within a year. 2diff Business tracks this ratio over time so you can see whether it is rising or falling. This is analysis, not a recommendation.

Why does 2diff Business show ROE and DuPont ROE?

They are the same return on equity reached two ways. ROE divides net income by total equity in one step. DuPont ROE multiplies net profit margin, total asset turnover and financial leverage, which gives the same figure and shows which of the three parts moved when the return changes.

Why do some ratios change in a year that is not finished?

Ratios that divide a period total by a balance on one date change in an unfinished year, because the total covers fewer months and the balance does not. Revenue divided by total assets is one example. When your connected accounting data has the same period one year earlier, 2diff Business shows those ratios on a trailing twelve month basis and compares revenue growth with the same period last year. When there is no earlier period to compare with, those ratios are left out for that year.

Can I add my own ratios in 2diff Business?

Yes. Below the 23 built-in ratios, the Custom ratios card lets you build a ratio from any two statement figures or your own saved figures, such as an owner salary addback, and it is calculated for every year in view. You can save up to 20 custom ratios.

See All 23 Ratios on Sample Books

The free demo runs these ratios on the books of the fictional landscaping company, so you can see each one in the app before you connect your own.

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This content is for educational purposes only and does not constitute financial, tax, accounting, or legal advice. Consult with a qualified professional for advice specific to your situation. AI-generated insights may contain errors; verify information before taking action.Intuit and QuickBooks^® are registered trademarks of Intuit Inc. Used with permission. Second Difference Solutions^®, LLC is an independent software provider and is not affiliated with, endorsed by, or sponsored by Intuit Inc. Our applications integrate with QuickBooks^® products via Intuit's official APIs.