How to Write a Financial Ratio Analysis

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A ratio analysis turns a company’s financial statements into a story about its health. The marks come not from calculating ratios — a spreadsheet does that — but from interpreting what they mean together and against a benchmark.

What a ratio analysis is really assessing

Ratio analysis reads a firm’s liquidity, profitability, efficiency, and solvency from its balance sheet and income statement. The number itself is meaningless in isolation — a current ratio of 1.5 is only “good” or “bad” relative to the industry, the prior year, or a competitor. Your job is comparison and interpretation, not calculation.

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The four ratio groups

  • Liquidity — can it pay short-term bills? (current ratio, quick ratio)
  • Profitability — how well does it convert sales to profit? (gross/net margin, ROA, ROE)
  • Efficiency — how well does it use assets? (inventory turnover, receivables days)
  • Solvency/gearing — how much does it rely on debt? (debt-to-equity, interest cover)

Always benchmark

Every ratio needs a comparator — prior year, an industry average, or a rival. “ROE rose from 11% to 18%, above the sector’s 14%” is analysis; “ROE is 18%” is just a number.

Structure that works

Open with the company and the purpose of the analysis. Take each ratio group in turn: state the figures (a small table helps), then interpret the trend and the benchmark, then explain the likely business cause. Close by synthesising — what the ratios say together about the firm’s overall position and prospects.

Interpret, then explain

Weak: The net margin fell from 9% to 6%.

Strong: The net margin fell from 9% to 6%, below the sector’s 8%, likely reflecting the higher input costs management flagged — a concern if it persists, though revenue grew over the same period.

Common mistakes

  • Listing ratios with no benchmark or trend.
  • Calculating without interpreting — pages of arithmetic, no insight.
  • Ignoring the limitations (one year’s data, accounting policies, non-financial factors).

Quick checklist

  • Is every ratio compared to a prior year or benchmark?
  • Do you explain the business cause, not just the movement?
  • Have you synthesised across groups into an overall verdict?
  • Did you note the limitations of the analysis?

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