Financial ratios

Meaning

Financial ratios (النسب المالية) turn the income statement and balance sheet into comparisons that mean something across years and against other businesses. They fall into four families. Profitability ratios, such as gross margin and net margin, show how much of each riyal of sales is kept. Liquidity ratios, such as the current ratio (current assets divided by current liabilities), show whether the bills due this year can be paid.

Activity ratios, such as inventory turnover and the days customers take to pay, show how hard assets are working. Leverage ratios, such as debt to equity, show how much of the business is financed by borrowing; banks often write minimums for these into loan agreements. A single ratio says little; the trend over several years, and the comparison with the same sector, says a great deal.

Also called: ratio analysis · profitability ratios · liquidity ratios · activity ratios · النسب المالية

Example

Al Noor's 2026 statements show sales of 2,400,000.00, gross profit of 720,000.00, net profit of 350,000.00, current assets of 1,100,000.00 and current liabilities of 550,000.00. Its gross margin is 30%, its net margin 14.6% and its current ratio 2.0: it holds two riyals of short-term assets for every riyal due within the year.