Business Accounting & Ratios

The money a company keeps from sales after subtracting the direct costs of producing its goods or services, known as the cost of goods sold (COGS). Calculated as revenue minus COGS, it shows how efficiently a company turns production into profit, before accounting for overhead like rent, salaries, taxes, and interest. It’s often expressed as a gross profit margin (gross profit divided by revenue) to compare profitability across companies or over time.

The profit a company earns from its core business operations, calculated by subtracting operating expenses, such as wages, rent, and the cost of goods sold, from revenue. It excludes non-operating items like interest and taxes, giving a clear view of how profitable the actual business is on its own. Also called operating profit or EBIT, it’s a key gauge of operational efficiency.

The amount of revenue left over from a sale after subtracting variable costs, representing what’s available to cover fixed costs and then contribute to profit. It can be measured per unit (selling price minus variable cost per unit) or as a ratio of sales. Businesses use it to determine their break-even point and to judge how profitable an individual product or service really is.

A liquidity ratio that measures a company’s ability to pay its short-term obligations with its short-term assets, calculated as current assets divided by current liabilities. A ratio above 1 means the company has more current assets than liabilities due within a year, generally signaling healthy short-term financial footing. What counts as “good” varies by industry, and a very high ratio can suggest the company isn’t using its assets efficiently.

A stricter liquidity measure than the current ratio, gauging a company’s ability to cover short-term liabilities using only its most liquid assets, excluding inventory. Also called the acid-test ratio, it’s calculated as current assets minus inventory, divided by current liabilities. A ratio of 1 or higher signals a company can meet its immediate obligations without relying on selling inventory, making it a more conservative test of financial health.

A profitability ratio that measures how efficiently a company uses its total assets to generate profit, calculated as net income divided by total assets. For example, an ROA of 10% means the company earns $0.10 of profit for every $1 of assets it owns. A higher ROA signals more efficient use of assets, though it’s most meaningful when compared within the same industry, since asset-heavy businesses naturally run lower than asset-light ones.

Money a company receives for goods or services it hasn’t yet delivered, recorded as a liability rather than income until the obligation is fulfilled. Common examples include subscription payments, prepaid services, and deposits, where the customer pays upfront. As the company delivers over time, the amount gradually shifts from a liability into earned revenue on the income statement.