Financial statements give you vital information about your business. The individual numbers, however, may not always give you a full picture of how well the business is doing, or help you make decisions. You can find out more by combining different values to form ratios, which offer key insights into your business's operations and health. You can explore how your business has performed in the past, and how it might perform in the future. Profitability ratios describe the business's ability to turn sales into profits and cash flow. The most common ratios in this category are gross profit margin, operating margin, and net profit margin, and they all use a similar calculation. For example, Sarah's flower business has made $50,000 operating profit this year. This is clearly a significant profit, but on its own, this figure does not tell Sarah much about her business performance or growth. Looking back, this is $25,000 more in operating profit than last year – so you can see that there has been growth. If you calculate the margin this year on her turnover, you see it is 10 percent. However, if you compare this to last year, you can see that though sales and profits have both increased, her profit growth has not been as fast as her revenue growth, raising questions about why her expenses are scaling faster than sales. Liquidity ratios indicate the stability of your business operations. The most common liquidity ratio is the current ratio, which is the ratio of current assets to current liabilities. This ratio indicates your business's ability to pay its short-term bills, and compares your short-term assets to your short-term liabilities. Sarah's current assets have increased along with her sales, but so have her current liabilities. Using the current ratio, we can see that her accounts payable – the money she owes to suppliers – is scaling more quickly than her assets. This may mean her business is less stable than last year, as well as having lower margins. While liquidity ratios look at your business's short-term stability, solvency ratios indicate the long-term financial stability of your business. They measure all of your business's debt against all of its assets. If your debt burden is very high, you may not have the flexibility to manage your cash flow if business slows down or interest rates rise. Sarah has taken on a long-term loan in her business that has increased her total liabilities. She has also increased her fixed assets with a new shop, but what is the net effect? The solvency ratio lets you compare the new situation with the past. On the next page, you will look closely at some of these key ratios.