A business with high and rising sales isn’t necessarily healthy. If the company is simultaneously bleeding cash due to rising advertising costs, stagnant inventory, or shrinking profit margins, it’s at risk of failure. To distinguish between a busy store and a profitable one, you need a sharp set of analytical tools.
These tools rely on accounting ratios to translate the raw numbers on your financial statements into clear, comparable insights about your company’s financial health. The following guide covers the essential accounting ratios every merchant should track to enhance operational efficiency.
Accounting ratios are calculations that highlight the relationship between two or more numbers found on a company’s financial statements—typically the balance sheet, income statement, and cash flow statement.
By analyzing accounting ratios, you turn raw financial data—like net income, current assets, and total assets—into valuable insights. These ratios help you answer critical questions, like whether you can afford to purchase more inventory or if you’re carrying too much debt.
For a small ecommerce business, financial reports can sometimes feel counterintuitive. You might see a high revenue number but notice your bank account is low. Accounting ratios provide the context needed to understand that conundrum.
High revenue doesn’t guarantee profitability. If your gross profit margin is negative because of costly operating inefficiencies, you’re losing money on each sale and need to decide if there are remedies—or if you should shut down. Or perhaps you are profitable, but your liquidity ratios show that you don’t have enough cash or cash equivalents to pay your suppliers next month. Ratios measure these specific aspects of your business, giving you a granular view of your company’s financial performance and operational efficiency.
To get a clear picture of your business’s financial condition, you don’t need to track every single metric—doing so is impractical. Instead, focus on a select mix of ratios that give you a 360-degree view of your store’s financial performance.
The ratios below cover the five essential pillars of retail finance: profitability, liquidity, efficiency, leverage, and valuation. Ecommerce businesses can use these metrics to identify and address the unique challenges of online retail, such as excess inventory or high return rates. Monitoring these key ratios regularly helps you track trends and make more informed financial decisions.
The gross profit margin is one of the most critical metrics for an ecommerce store. It tells you how much profit you make on each product sold before accounting for operating expenses like rent, marketing, and payroll.
Formula: (Net sales – Cost of goods sold) / Net Sales x 100
How to calculate: Take your net sales (total sales minus returns and discounts) and subtract the cost of goods sold (COGS), or the expenses your business paid for materials, components, and labor directly related to production. Divide that number by net sales.
Example: If your store had $50,000 in sales and the goods cost $30,000 to manufacture, the calculation is ($50,000 – $30,000) / $50,000 = 0.4 x 100. Your gross profit margin is 40%.
Gross profit margin measures your production efficiency and pricing strategy. If this number is low, your product costs may be too high, your prices too low, or both.
Benchmark: For ecommerce, a healthy gross profit margin typically falls between 35% and 55%. If you are a direct-to-consumer (DTC) brand manufacturing your own goods, you might aim for closer to 50% to 60% to provide the buffer needed to fund the higher cost of digital advertising and product development.
While gross margin focuses on product costs, the net profit margin reflects the bottom line. It reveals what percentage of revenue remains as profit after all expenses—such as operating costs, interest, and taxes—have been paid.
Formula: (Net income / Net sales) x 100
How to calculate: Divide your company’s net income by your net sales.
Example: If your store made $100,000 in sales and your final profit after all expenses was $15,000, the calculation is $15,000 / $100,000 = 0.15 x 100. Your net profit margin is 15%.
This ratio measures a company’s overall profitability. It answers the question: “For every dollar of sales, how many cents do we keep?” This is the ultimate indicator of whether a company generates profits.
Benchmark: A healthy net profit margin in ecommerce is generally about 10% to 15%.
The current ratio is one of the primary liquidity ratios, which measure a company’s ability to pay its short-term debt obligations—typically those due in a year or less—with its short-term assets.
Formula: Current assets / Current liabilities
How to calculate: Divide your current assets (including cash, inventory, accounts receivable) by your total current liabilities (accounts payable, short-term debt). Both figures are found on the balance sheet.
Example: If you have $40,000 in assets (cash and inventory) and owe $20,000 soon, the calculation is $40,000 / $20,000 = 2.
This ratio of current assets to liabilities tells you if you can pay your bills during the next 12 months. A ratio of less than 1 suggests you may run out of cash.
Benchmark: Ideally, you want a current ratio between 1.5 and 2.
The quick ratio, or acid test ratio, is a stricter measure of liquidity than the current ratio. It removes inventory from the equation because inventory can’t always be sold quickly to pay bills.
Formula: (Current assets – Inventory) / Current liabilities
How to calculate: Subtract inventory from your current assets, then divide by current liabilities.
Example: You have $40,000 in assets, but $20,000 of that is inventory. You have $15,000 in bills. The calculation is ($40,000 – $20,000) / $15,000 = 1.33.
This measures your company’s ability to pay debts using only assets that are most liquid (cash and accounts receivable).
Benchmark: A quick ratio of 1 or higher is considered healthy. If it’s significantly lower, you rely too much on selling inventory to stay afloat.
For ecommerce, inventory is cash sitting on a shelf. The inventory turnover ratio shows how many times you sell and replace your entire stock of inventory in a given period.
Formula: Cost of goods sold / Average inventory
How to calculate: Divide cost of goods sold by your average inventory, or (Beginning inventory + Ending inventory) / 2.
Example: Your COGS for the year was $100,000. Your average inventory value was $20,000. The calculation is $100,000 / $20,000 = 5. You turned over your inventory five times.
This turnover ratio reveals how effectively you manage stock. A low number suggests overstocking, while a very high number might mean you aren’t buying enough to meet demand, which could lead to stockouts.
Benchmark: A good inventory turnover ratio for ecommerce is typically between four and six times per year.
This is one of the key leverage ratios, or solvency ratios. It compares how much debt you are using to finance the business versus how much capital shareholders have put in.
Formula:Total liabilities / Total shareholder equity
How to calculate: Divide total liabilities—debt, loans, and other financial obligations—by total equity, which represents the value of the shareholders’ stake in the business. Both are listed on the balance sheet.
Example: Your business has $60,000 in total liabilities and $50,000 in owner equity. The calculation is $60,000 / $50,000 = 1.2.
The debt-to-equity ratio assesses financial risk. A high ratio means the business is aggressively funded by debt, a risky practice if sales slow down.
Benchmark: Lower is usually better, but it depends on your growth stage and industry. A ratio between 1 and 1.5 is often acceptable, but anything above 2 can signal high risk.
The return-on-equity (ROE) ratio measures how effectively you are using the money investors put into the business.
Formula: Net income / Shareholder equity
How to calculate: Divide net income by the total equity.
Example: Your store generated $20,000 in net income this year. The shareholders have $100,000 in equity in the company. The calculation is $20,000 / $100,000 = 0.2 x 100. Your ROE is 20%.
Return on equity is a favorite among investors because it shows the return they are getting on their money. It is a key indicator of financial performance and business valuation.
Benchmark: A ROE of 10% to 15% is considered average for many growth-stage online retailers.
The asset turnover ratio measures how well a company uses its total assets to generate revenue.
Formula: Net sales / Average total assets
How to calculate: Divide your net sales by the average value of your assets.
Example: You generated $250,000 in sales using assets (cash, equipment, inventory) valued at $100,000. The calculation is $250,000 / $100,000 = 2.5.
If you have a warehouse full of expensive equipment and inventory but low sales, your asset turnover ratio will be low. This ratio shows a company’s ability to squeeze value out of its stock.
Benchmark: Generally, a ratio above 1 is good for ecommerce, as online businesses tend to have few physical assets compared to other industries like heavy manufacturing.
*Shopify Capital loans must be paid in full within a maximum of 18 months, and two minimum payments apply within the first two six-month periods. The actual duration may be less than 18 months based on sales.
Accounting ratios are generally categorized into five main groups: liquidity ratios, solvency (or leverage) ratios, profitability ratios, efficiency ratios, and valuation ratios. These categories help you measure different aspects of your business, ranging from your ability to pay short-term debts and long-term obligations to how effectively you are generating earnings and utilizing your assets.
Calculating ratios is a three-step process: pull the relevant figures from your company’s financial statements, select the correct formula, and do the math. Most calculations involve dividing net income, total assets, or liabilities by another financial figure to find the relationship between them.
The DuPont analysis breaks down return on equity (ROE) into three components: net profit margin, asset turnover, and financial leverage. This helps you identify if your ROE is high because you are efficient or simply because you are borrowing heavily. Specifically, debt lets you purchase more profit-generating assets than your own capital would allow. Because ROE only measures the return on equity, using debt to boost total profits increases the ratio.
