When assessing a company's financial health, three ratios give you a quick and reliable picture: the current ratio, return on assets and the equity ratio. Biztrac calculates these automatically for every company that has filed annual accounts. Here is what they mean and what to look for.
Current ratio — can the company pay its bills?
The current ratio measures whether a company has enough short-term assets to cover its short-term liabilities.
The formula: Current assets ÷ Current liabilities
- Above 2.0: Very good — the company has a comfortable buffer
- 1.5–2.0: Good
- 1.0–1.5: Satisfactory
- Below 1.0: Weak or unsatisfactory — the company may struggle to pay its short-term debt
A holding company can have a low current ratio without it being a problem, because it has no ongoing operating costs. For a trading company with significant inventory purchases and supplier debt, the current ratio matters a great deal.
Return on assets — is the business profitable?
Return on assets shows how much return the company generates on its total assets, regardless of how those assets are financed.
The formula: (Operating profit + Financial income) ÷ Average total capital × 100%
- Above 10%: Very good
- 6–10%: Good
- 2–6%: Satisfactory
- Below 2%: Weak
Return on assets should be compared with the company's borrowing rate. If a company borrows at 5% but achieves only 3% return on assets, that is an unfavourable sign — it is not earning enough to service its debt.
Equity ratio — how solid is the company?
The equity ratio (solidity) shows what proportion of the company's assets is financed by equity — by the owners themselves, rather than by banks and creditors.
The formula: Equity ÷ Total capital × 100%
- Above 40%: Very good
- 25–40%: Good
- 10–25%: Satisfactory
- Below 10%: Weak — the company is largely debt-financed
A high equity ratio means the company can absorb losses without becoming insolvent, and is less exposed to rising interest rates. Industries vary widely: property companies typically have a low equity ratio (they finance property with substantial debt), while consultancies tend to have a high one.
Use the ratios together
None of these ratios should be judged in isolation. A company can have good solidity but poor liquidity — for instance because much of its capital is tied up in property that cannot easily be converted to cash. Always look at all three together, and compare them with the industry and with the company's own history over time.
On Biztrac all three ratios appear automatically on the company page for companies that have filed annual accounts, with a simple assessment ranging from "Unsatisfactory" to "Very good".