Why turn a big number into a ratio?

You have a company's financial statements open. Revenue: $80 billion. Profit: $16 billion. Debt: $40 billion. Big, impressive numbers — and almost useless on their own. Is $16 billion of profit good? You genuinely cannot say until you ask: out of how much?

That single instinct — "out of how much?" — is what a ratio answers. A ratio takes one number from the statements and divides it by another, turning a raw figure into a rate you can compare across companies of wildly different sizes.

Same business, two sizes

Imagine two coffee chains. Chain A earns $16 billion of profit on $80 billion of sales. Chain B earns $2 million on $10 million of sales. In raw dollars, Chain A dwarfs Chain B by a factor of thousands. But convert each to a rate:

• Chain A: $16bn / $80bn = 20% of every sales dollar kept as profit.
• Chain B: $2m / $10m = 20% of every sales dollar kept as profit.

Identical. The ratio strips out size and lets a corner shop stand next to a giant on the same measuring stick. That is the whole superpower of ratio analysis — and why analysts speak in percentages and multiples, not in raw billions.

Three questions ratios answer

Every ratio in this course serves one of a few plain-English questions about a business:

• Is it profitable? How much of each sales dollar survives to the bottom line (this unit).
• Can it pay its bills? Liquidity and how much it borrows (next unit).
• Does it use its assets well? Efficiency and turnover (unit three).

A ratio is never a verdict by itself. A "20% margin" means nothing until you compare it — to the same company last year, to a direct competitor, or to the industry norm. A ratio without a comparison is just a number wearing a percent sign.

In the data

Data services publish ratios ready-made. Here are four of Apple's, as a data provider quotes them:

"TTM" means trailing twelve months, the last four quarters added together. A published ratio usually hides its own definition: which period, which denominator, averaged or year-end. That is exactly why two sources can quote a different "profit margin" for the same company and neither be wrong, and why this course has you build the ratio yourself before trusting the published one.

Try it now

Below is Apple's most recent complete financial year, as filed:

1. Take net income and total revenue from the table and divide the first by the second.
2. That percentage is your first ratio — the net profit margin. Write it down, and set it beside the published profit margin in the table above. Say why the two need not match: one is a fiscal year, the other the last twelve months.
3. Now notice that you still have no idea whether it is good. That honesty is the correct starting point; the next lessons give you the comparisons that turn a number into judgement.

A note on what we do here. EODHD Academy teaches how to read companies, not what to do about them. Every ratio here is an observation, never a recommendation to buy or sell. Tickers are illustrations using real, rounded numbers.