[Reader Q&A] How do I know whether a given financial ratio is appropriate, too high, or too low?

What counts as a healthy financial ratio depends on a company's industry, size, goals, and market conditions. Judging it well means weighing industry benchmarks, your own internal targets, and where the market sits. Below are the key financial ratios, what to look for, and how to evaluate them.

1. Liquidity ratios

Current ratio l Quick ratio l Quick assets to monthly revenue

Healthy range: Generally between 1.0 and 2.0 l Below 1.0: possible difficulty covering short-term obligations l Above 2.0: assets may be tied up in excess liquidity 

*Varies by industry — manufacturers, for example, carry a lot of inventory, so a higher current ratio is normal. Using the ratio of quick assets to monthly revenue to gauge liquidity has become increasingly common in recent years.

2. Leverage ratios

Debt-to-equity ratio l Interest coverage ratio

How to read them:

• Debt-to-equity: Manufacturing: 100%–200% is healthy, above 200% is a red flag l Financial services: given how heavily the business runs on leverage, even 400%+ is common

• Interest coverage: Below 1.5: limited ability to service interest l  3.0 or above: stable

3. Profitability ratios

Gross profit margin l Operating profit margin l Net profit margin

How to read them:

• Gross profit margin: Manufacturing: 20%–30% l Services: 50%+ is achievable

• Operating margin: 10% or above is solid

• Net margin: 5%–15% is typical, 20%+ is excellent

4. Efficiency ratios

Asset turnover l  Inventory turnover

How to read them:

• Asset turnover: Manufacturing: 0.5–1.0 is healthy l Retail: 2.0+ is ideal

• Inventory turnover: Varies by industry, but 6–12 times is typical

5. Return-on-investment ratios

ROE (return on equity) l ROIC (return on invested capital)

How to read them:

• ROE: 10%–20% is good, above 20% is excellent

• ROIC: Ideally above the company's weighted average cost of capital (WACC)