Ratios organize a diagnosis
A ratio puts two related amounts in context. Profitability ratios describe earnings relative to revenue or resources. Liquidity ratios describe short-term resources relative to obligations. Activity ratios describe asset use. Leverage and coverage ratios describe financing and repayment capacity. No single ratio can establish that a business is healthy.
Compare scale without losing economics
Company A earns $20m on $100m revenue, while B earns $30m on $300m revenue. A's net margin is 20%; B's is 10%. B earns more total income, but A earns more per sales dollar. Before favoring either, compare business mix, capital requirements, risk and the source of earnings.
The current ratio is current assets divided by current liabilities. A high value can reflect liquidity, but also slow inventory or overdue receivables. Interest coverage often uses EBIT divided by interest, while debt-to-EBITDA compares a debt stock with an annual earnings flow. Definitions, averages and periods must be explicit.
Common-size statements express line items relative to a common base, such as revenue for an income statement or total assets for a balance sheet. They help identify shifts in cost structure or asset composition. They do not remove framework, perimeter or valuation differences.
Use trends, peers and operating evidence together. If receivable days worsen, inspect terms and collections. If margin improves, inspect price, mix, input costs and accounting estimates. The ratio describes a pattern; the explanation requires additional evidence.