A company can report growing sales, make a profit and still struggle to pay salaries. Another can have a modest profit margin but collect money quickly, carry little debt and finance its own growth. Financial ratios help you understand these differences.
For an MBA student, the useful skill is not memorizing dozens of formulas. It is learning to connect a number to a business question: Can we pay? Are we using resources efficiently? Are we earning enough? Can we survive a difficult period?
This guide explains a practical selection of financial ratios and related operating metrics for comparing businesses in 2026. Each measure includes a formula, a worked example, a business use and a limitation. It also explains which information Odoo ERP can provide and when an agreed calculation or custom report is needed.
Reading date: October 9, 2026. The examples are fictional teaching cases, not ERPixel client results or market benchmarks. A complete 2026 financial year is not yet available for a calendar-year company: use comparable year-to-date periods or the latest trailing twelve months.
Why financial ratios matter in 2026
The underlying formulas have not suddenly changed. What matters is choosing measures that reveal how a particular business earns money, funds growth and handles risk.
There is a current reason to pay attention to financing and cash. The IMF's April 2026 Global Financial Stability Report discusses elevated financial stability risks, energy-price pressures, potentially tighter financing conditions and vulnerabilities in private credit. Those are macroeconomic findings, not a prediction that every company will fail. Our practical inference is that a comparison based only on revenue growth is incomplete: debt service, cash generation and working-capital needs also deserve attention. Source: IMF, April 2026, Chapter 1.
Consider three fictional management situations:
- A wholesaler grows sales by 25%. Customers now pay after 75 days rather than 45. An extra 30 days of credit ties up roughly €98,630 at annual credit sales of €1.2 million: €1,200,000 ÷ 365 × 30. Growth has increased the need for financing.
- A manufacturer reports a 15% EBITDA margin. Replacing equipment costs €300,000 annually, while operating cash flow is only €200,000. EBITDA does not show the €100,000 cash shortfall after this investment.
- A subscription company grows recurring revenue by 30%. Revenue from its existing customer cohort falls by 15%. New sales are hiding a retention problem.
These situations call for different measures. A single “business health score” would conceal the decisions management needs to make. For the accounting foundations, start with our guide to the accounting equation and Odoo Balance Sheet. For the distinction between earnings and bank money, read Cash Flow Isn't Profit.
The terms you need before calculating anything
On smaller screens, swipe or scroll tables horizontally to read every column.
A financial ratio divides one financial quantity by another. Dividing €72,000 of profit by €1,200,000 of revenue gives 0.06, or a 6% profit margin. This makes businesses of different sizes easier to compare, although it does not make businesses with different economics identical.
A KPI, or key performance indicator, is a measure management chooses to monitor a goal. Some KPIs are financial ratios; others are amounts, days, counts or operating rates. Cash runway, MRR and the cash conversion cycle are useful metrics, but they are not all financial ratios.
| Term | Plain-language meaning | Where it comes from |
|---|---|---|
| Revenue | Sales earned under the applicable recognition rules, after relevant returns and discounts. It is not every receipt in the bank. | Profit and Loss statement; see revenue recognition. |
| COGS / cost of sales | The cost attributable to the goods or services sold. Buying inventory and selling it need not happen in the same period. | Profit and Loss, supported by inventory valuation. |
| Assets | Resources controlled by the company, such as cash, receivables, inventory and equipment. | Assets in the Balance Sheet. |
| Liabilities | Present obligations, such as supplier bills, loans and certain customer advances. | Liabilities in the Balance Sheet. |
| Equity | Assets minus liabilities: the owners' residual accounting interest. It is not the company's market price or its bank balance. | Equity in the Balance Sheet. |
| Current assets / liabilities | Assets expected to be realized and obligations expected to be settled within the normal operating cycle, or otherwise meeting the applicable short-term classification rules, often within twelve months. | Balance Sheet classification. |
| Working capital | Here, current assets minus current liabilities. Analysts may use a different, explicitly defined operating working-capital measure. | Balance Sheet. |
| EBIT | Earnings before interest and tax. In our simple example, this equals operating profit; it need not do so where there are other non-operating items. | Profit and Loss and a reconciliation. |
| EBITDA | Earnings before interest, tax, depreciation and amortization. It is an earnings measure, not cash available to spend. | Profit and Loss plus a reconciliation of depreciation and amortization. |
| CFO / operating cash flow | Net cash generated or used by operating activities. Borrowing and owner contributions are financing, not operating cash generation. | Cash Flow Statement. |
| CapEx | Capital expenditure: investment in long-term assets. Here, the FCF calculation uses cash paid for those investments. | Cash Flow Statement and fixed-asset records. |
| Average balance | Usually (opening balance + closing balance) ÷ 2 for a simple example. Monthly or daily averages can describe seasonal businesses much better. | Historical account balances. |
| TTM / cohort | TTM means trailing twelve months. A cohort is a fixed group, such as customers acquired in the same quarter or customers active at the start of a period. | Reporting dates and customer records. |
The SEC's beginner guide to financial statements is useful background reading. The familiar grouping into liquidity, activity, solvency and profitability also appears in the CFA Institute's 2026 financial analysis curriculum.
Five calculation rules that prevent misleading results
- Match dates. Compare nine months with nine months, or TTM with TTM. For turnover and returns, match the average balance to the period whose sales or profits you use.
- Match scope. Use one legal entity or a properly consolidated group consistently. Adding subsidiaries without eliminating intercompany sales can inflate revenue and turnover. See financial consolidation.
- Match accounting. Check revenue recognition, leases, depreciation, inventory costing and expense capitalization before declaring a winner.
- Match tax and currency bases. Sales normally exclude VAT collected for the tax authority. Receivables and payables may include VAT, so document or adjust this mismatch in days calculations. Use consistent currency translation; a percentage is not automatically immune to exchange-rate effects.
- Show the denominator. A ratio with a zero denominator is undefined. A tiny or negative denominator can produce a dramatic number with little economic meaning. Do not turn it into a green dashboard badge.
Our worked example: a fictional wholesale company
To keep the arithmetic readable, amounts below are in € thousands. “1,200” therefore means €1,200,000. We use a full 365-day teaching period, all sales are on credit, and trade balances are on a comparable VAT basis. These are selected reporting inputs, not a complete set of financial statements.
| Annual performance / cash-flow input | € thousands | Meaning |
|---|---|---|
| Revenue | 1,200 | Sales earned during the year. |
| Cost of sales | 720 | Cost of the goods sold. |
| Gross profit | 480 | 1,200 − 720. |
| Operating expenses excluding depreciation/amortization | 300 | Operating overheads. |
| EBITDA | 180 | 480 − 300. |
| Depreciation and amortization | 60 | Allocation of long-term asset costs. |
| EBIT / operating profit | 120 | 180 − 60. |
| Interest expense | 24 | Financing cost. |
| Profit before tax / income tax / net profit | 96 / 24 / 72 | Effective tax rate of 25% in this simplified case. |
| Operating cash flow / cash CapEx | 90 / 60 | Operating cash generated and cash invested. |
| Credit purchases of inventory | 760 | Purchases, distinct from the cost of inventory sold. |
| Balance-sheet input | Closing balance | Period average, where used |
|---|---|---|
| Unrestricted cash and cash equivalents | 100 | — |
| Trade receivables | 160 | 150 |
| Inventory | 200 | 180 |
| Prepayments | 40 | — |
| Current assets | 500 | — |
| Total assets | 1,100 | 1,000 |
| Trade payables | 100 | 90 |
| Current interest-bearing debt / other current liabilities | 80 / 70 | — |
| Total current liabilities | 250 | — |
| Long-term interest-bearing debt | 400 | — |
| Total liabilities | 650 | — |
| Equity | 450 | 400 |
| Invested capital, under our agreed operating definition | — | 750 |
The closing Balance Sheet balances: 1,100 = 650 + 450. The invested-capital average is a separately prepared input, excluding non-operating assets under the agreed definition; it is not simply total assets. The cost of capital means the return required by the providers of debt and equity, given the risks they bear. Where we introduce a different business, its figures are stated separately.
Liquidity: can the company meet near-term obligations?
Liquidity describes the ability to meet payments when due. A profitable company can have weak liquidity because its money is tied up in stock or unpaid invoices. For a second explanation of the three conventional liquidity ratios, see OpenStax: Liquidity Ratios.
1. Current ratio
Formula: Current assets ÷ Current liabilities.
Example: 500 ÷ 250 = 2.0×. The company has €2 of current assets for each €1 of current liabilities. Its working capital is 500 − 250 = €250,000.
Business use: Assess the short-term funding cushion before increasing purchases or accepting a large order with delayed payment.
Limits: A value above 1 means book current assets exceed book current liabilities; it does not prove that cash will arrive before bills fall due. Old inventory and disputed receivables weaken the apparent cushion. A retailer collecting at checkout may operate successfully below 1. “2 is always healthy” is not a universal rule.
Odoo: The standard Accounting Executive Summary documents “Current assets to liabilities.” Verify current/non-current account mapping and report filters. The Balance Sheet supplies the underlying balances.
2. Quick ratio, or acid-test ratio
Formula used here: (Unrestricted cash + Liquid short-term investments + Net trade receivables) ÷ Current liabilities.
Example: (100 + 0 + 160) ÷ 250 = 1.04×. Unlike the current ratio, this calculation excludes the €200,000 of inventory and €40,000 of prepayments.
Business use: Test how dependent the payment plan is on selling stock first.
Limits: Receivables are not cash. Late, disputed or concentrated customer debts can make even 1.04 optimistic. Some published formulas subtract inventory and prepayments from all current assets; identify any other illiquid balances before comparing.
Odoo: Accounting provides balances; Aged Receivable helps review collection risk. A quick-ratio line using the company's selected account groups can be configured in a custom financial report.
3. Cash ratio
Formula used here: Unrestricted cash and cash equivalents ÷ Current liabilities.
Example: 100 ÷ 250 = 0.40×. Cash alone covers 40% of current liabilities at that date.
Business use: Assess immediate payment resilience under a collections delay.
Limits: Not all liabilities fall due today. A ratio below 1 is common and is not automatically a crisis; a very high ratio may indicate idle funds. Restricted cash should not be treated as freely available. Bank balances also need reconciliation.
Odoo: Use cash-account balances and bank reconciliation, then add the agreed formula. A forward payment forecast remains necessary because this ratio is a snapshot.
Activity: how quickly does money move through the business?
Turnover ratios measure sales or costs relative to resources used during a period. Their “days” equivalents make the result easier to connect to collections, procurement and stock planning.
4. Inventory turnover and days inventory outstanding (DIO)
Formulas: Inventory turnover = Cost of sales ÷ Average inventory. DIO = Average inventory ÷ Cost of sales × Days in period.
Example: 720 ÷ 180 = 4.0 turns per year; 180 ÷ 720 × 365 = 91.3 days. On average, the business carries roughly three months of inventory at this cost basis.
Business use: Identify excess purchasing and slow-moving product families; decide where replenishment rules should change. See inventory turnover and reordering rules.
Limits: Higher turnover is not always better: insufficient stock can lose sales. Compare similar product categories, lead times and valuation methods. Financial DIO is not the age of each item on a shelf. It is generally irrelevant for a service business with no material inventory.
Odoo: Inventory's Stock report, movement history and historical valuation provide operational inputs; Accounting supplies cost of sales. Reconcile them at the same date and after the applicable closing adjustments. Product-level turnover and DIO may require a configured report or BI calculation. Read How Odoo Inventory Works and our Odoo 19 inventory valuation guide.
5. Receivables turnover and days sales outstanding (DSO)
Formulas: Receivables turnover = Net credit sales ÷ Average trade receivables. DSO = Average trade receivables ÷ Net credit sales × Days in period.
Example: 1,200 ÷ 150 = 8.0 turns; 150 ÷ 1,200 × 365 = 45.6 days.
Business use: Compare payment performance with customer terms and identify how much working capital collections could release. Read DSO and our accounts receivable introduction.
Limits: If most sales are cash sales, total revenue understates the collection time of credit customers. Sales spikes also distort the average. DSO is not the same as days overdue: a 60-day invoice can be unpaid without being late. Review receivables aging alongside it.
Odoo: Executive Summary includes “Average debtors days,” and Aged Receivable shows outstanding amounts. Check the built-in metric's definition against the average-balance DSO formula above; use a configured calculation when the benchmark requires this exact basis.
6. Payables turnover and days payable outstanding (DPO)
Formulas: Payables turnover = Credit purchases ÷ Average trade payables. DPO = Average trade payables ÷ Credit purchases × Days in period.
Example: 760 ÷ 90 = 8.44 turns; 90 ÷ 760 × 365 = 43.2 days.
Business use: Understand supplier funding and negotiate terms that match customer collections. See DPO.
Limits: Delaying suppliers beyond agreed terms can damage supply continuity. Cost of sales is sometimes used as a purchases proxy, but the two differ when inventory changes. In our example, using 720 instead of 760 gives 45.6 days rather than 43.2. Match purchase categories to the payables included.
Odoo: Executive Summary includes “Average creditors days”; vendor bills, Purchase and Aged Payable supply detail. For a comparable DPO calculation, select the correct credit-purchase population and average payables. Our accounts payable guide explains the operational records.
7. Cash conversion cycle (CCC)
Formula: DIO + DSO − DPO.
Example: 91.3 + 45.6 − 43.2 = 93.7 days, using rounded inputs. Inventory and customer credit keep funding tied up much longer than suppliers fund the company.
Business use: Diagnose whether cash pressure comes mainly from stock, collections or supplier terms. Moving DSO from 45.6 to 35.6 releases approximately €32,877 at unchanged annual credit sales: €1,200,000 ÷ 365 × 10.
Limits: CCC is an aggregate estimate, not the journey of every euro or a full cash forecast. Taxes, salaries, CapEx and debt repayments are absent. Negative CCC can be attractive when customers pay first; it can also hide overdue suppliers. For subscriptions and project businesses, another operating-cycle model may be more suitable.
Odoo: Combine the agreed inventory, receivables and payables measures in a report or dashboard. Having all three operational areas in Odoo reduces separate data collection, but does not remove the need for consistent definitions. See cash conversion cycle.
8. Total asset turnover
Formula: Revenue ÷ Average total assets.
Example: 1,200 ÷ 1,000 = 1.20×. Each €1 of average book assets supports €1.20 of annual revenue.
Business use: Assess whether capacity and assets are producing sales, particularly when expanding warehouses or buying equipment.
Limits: Outsourcing, leasing and older depreciated assets can increase the ratio without improving operations. A software company and a factory have very different asset needs. Acquisitions and goodwill can change it sharply.
Odoo: Profit and Loss supplies revenue; historical Balance Sheets supply averages. Configure a periodic calculation with consistent fixed-asset and lease treatment.
9. Equity turnover
Formula: Revenue ÷ Average equity.
Example: 1,200 ÷ 400 = 3.0×. The company generates €3 of revenue for each €1 of average owners' book capital.
Business use: Explain how intensively owners' capital supports sales, alongside profit margin and leverage.
Limits: Revenue is not profit. Borrowing or share buybacks can make equity turnover rise by shrinking the denominator. Zero, negative or very small equity makes comparison unreliable. This is equity turnover, not return on equity; ROE comes later.
Odoo: Calculate it from revenue and historical equity balances. A high value should link to a debt and equity review rather than automatically indicate success.
Solvency: how much financial risk is the company carrying?
Solvency concerns the ability to sustain obligations over time. Separate trade credit from interest-bearing borrowing, and examine repayment dates as well as totals.
10. Debt-to-equity and the equity ratio
Formulas used here: Debt-to-equity = Interest-bearing debt ÷ Equity. Equity ratio = Equity ÷ Total assets × 100%.
Example: (80 + 400) ÷ 450 = 1.07× debt-to-equity; 450 ÷ 1,100 × 100% = 40.9% equity ratio.
Business use: Understand financing dependence before adding a loan, and show how much of the asset base is financed by owners' accounting capital.
Limits: Some sources call total liabilities ÷ equity “debt-to-equity.” That gives 650 ÷ 450 = 1.44× here, a different measure. Label the numerator, and agree whether lease liabilities count as debt. Neither ratio reveals maturity concentration; both can be misleading with negative equity. Industry and lender requirements differ.
Odoo: Balance Sheet account groups provide equity and liabilities. Identify borrowing separately from suppliers, tax and customer advances; apply the agreed lease policy. Custom financial-report lines can show both definitions without mixing them.
11. Interest coverage
Formula used here: EBIT ÷ Interest expense.
Example: 120 ÷ 24 = 5.0×. If annual interest rises to 40 with EBIT unchanged, coverage falls to 3.0×.
Business use: Evaluate earnings sensitivity to refinancing or interest-rate changes.
Limits: It excludes repayment of principal and does not guarantee cash availability. An EBITDA-based coverage measure will give a different answer. With zero interest the ratio is undefined; with negative EBIT, a positive-looking interpretation is inappropriate. No single coverage threshold fits every lender.
Odoo: Use agreed Profit and Loss lines and borrowing schedules. Our loan management article explains accounting workflows; a forecast needs future repayment and rate assumptions as well.
12. Net debt / EBITDA
Formula used here: (Interest-bearing debt − Unrestricted cash and cash equivalents) ÷ Annual or TTM EBITDA.
Example: (480 − 100) ÷ 180 = 2.11×.
Business use: Compare leverage among businesses with similar economics, and monitor an explicitly defined loan covenant.
Limits: This does not mean the debt can be repaid in 2.11 years: EBITDA omits tax, working capital, CapEx and other cash needs. Match lease treatment and EBITDA adjustments. Negative or near-zero EBITDA makes the multiple unusable; negative net debt indicates a net cash position, not negative risk.
Odoo: Accounting supplies inputs, but define cash availability and EBITDA adjustments in a configured report. Covenant definitions take precedence over a generic dashboard formula.
13. Debt service coverage ratio (DSCR)
Cash-based formula used in this separate example: Cash flow available for debt service (CFADS) ÷ Required cash interest and principal repayments for the same period.
Example: A borrower has €96,000 of defined CFADS and €84,000 of debt service: 96 ÷ 84 = 1.14×. If CFADS falls 20%, coverage becomes 76.8 ÷ 84 = 0.91×, below full payment coverage.
Business use: Check whether the repayment schedule fits the company's cash generation. At 1.0× under this definition, cash just covers the scheduled debt service.
Limits: Lenders use different numerators, including adjusted earnings measures; CFADS must be defined and reconciled. Do not substitute CFO automatically or assume an EBITDA-based DSCR is cash-based. Contractual thresholds and measurement periods vary. The BDC explanation of DSCR illustrates why the lender's calculation matters.
Odoo: Build the covenant calculation from financial data and a complete repayment schedule, with a forecast for future periods. ERPixel can configure or develop this reporting; a generic standard DSCR is not assumed here.
Profitability: how much does the business earn?
Margins describe profit per euro of sales. Returns describe profit relative to assets or capital. A high margin can coexist with a poor return if the business ties up too much capital.
14. Gross profit margin
Formula: (Revenue − Cost of sales) ÷ Revenue × 100%.
Example: (1,200 − 720) ÷ 1,200 × 100% = 40%. Each €1 of sales leaves €0.40 before the operating expenses excluded from cost of sales.
Business use: Review pricing, purchasing and product mix; investigate margin loss before cutting unrelated overheads.
Limits: A software company and a wholesaler classify and incur delivery costs differently. Include appropriate direct labor, hosting or fulfillment costs under a consistent policy. Gross margin is not the same as markup: selling an item costing €60 for €100 gives 40% margin but 66.7% markup.
Odoo: Executive Summary documents gross profit margin. Product costs, valuation and accounting mappings must be correct. Sales-order margin is an operational view and may differ from posted financial gross margin. Our landed costs guide explains why freight and import costs can change inventory cost and margin.
15. Operating profit margin
Formula: Operating profit ÷ Revenue × 100%.
Example: 120 ÷ 1,200 × 100% = 10%.
Business use: Assess operating profitability after overheads and depreciation, before financing and income tax. It can help compare operating performance when companies use different debt structures.
Limits: Accounting classification and asset age still matter. Capitalizing software development rather than expensing it can improve today's operating margin. Exceptional costs should be disclosed, with reported and adjusted versions shown separately.
Odoo: Use posted Profit and Loss totals and, where appropriate, analytic accounting for departments or business lines. Agree how shared costs are allocated before ranking teams.
16. EBITDA margin
Formula: EBITDA ÷ Revenue × 100%.
Example: 180 ÷ 1,200 × 100% = 15%. In this example EBITDA = EBIT 120 + depreciation/amortization 60.
Business use: Compare an earnings layer before depreciation and financing, particularly among similar businesses; show a bridge from operating profit to EBITDA.
Limits: EBITDA ignores the cash cost of replacing equipment, working capital and tax. Lease accounting can change comparability. “Adjusted EBITDA” may exclude expenses another company includes. The SEC's non-GAAP guidance is a useful reference for transparent reconciliation; it is not a global rule that every private company must report EBITDA.
Odoo: Configure the selected EBITDA calculation and show which accounts or adjustments are included. Do not treat a ready-made margin label as proof that the definition matches an investor's model.
17. Net profit margin
Formula: Net profit ÷ Revenue × 100%.
Example: 72 ÷ 1,200 × 100% = 6%. Each €1 of sales leaves €0.06 after all recognized expenses in the example.
Business use: Understand the combined effect of operations, financing and tax; assess whether pricing and cost structure leave enough earnings for owners.
Limits: One-off gains, tax differences and debt structure affect comparison. A company can show profit without collecting cash. Negative margins are meaningful losses, not a division error, provided revenue is positive.
Odoo: Executive Summary documents net profit margin, supported by Profit and Loss. Compare posted periods after appropriate accruals, tax and closing adjustments.
18. Return on assets (ROA)
Formula used here: Net profit ÷ Average total assets × 100%.
Example: 72 ÷ 1,000 × 100% = 7.2%.
Business use: Relate earnings to the size of the asset base. It helps explain why an apparently profitable expansion may still use assets inefficiently.
Limits: This version includes the effect of financing through net profit. Operating ROA uses another numerator. Book asset values, goodwill and lease accounting can differ greatly between companies; do not mix formulas.
Odoo: Use Profit and Loss with average Balance Sheet assets. Executive Summary also documents a “Return on investment (per annum)” measure; inspect its exact calculation before treating it as this ROA or as ROIC.
19. Return on equity (ROE)
Formula for our simple single-owner-class example: Net profit ÷ Average equity × 100%.
Example: 72 ÷ 400 × 100% = 18%. This is earnings relative to owners' book capital, not a guaranteed cash payout or stock-market return.
Business use: Assess how profit relates to equity invested and retained in the business. For groups or multiple share classes, match profit attributable to the relevant owners with their equity.
Limits: Borrowing, losses accumulated in earlier years or buybacks can shrink equity and inflate ROE. With negative equity, even a positive ratio produced by dividing a loss by negative equity is not evidence of success.
Odoo: Calculate a consistent average-equity return from financial reports; for a group, use consolidated figures with non-controlling interests handled consistently.
The DuPont connection: explain ROE instead of admiring it
Formula: ROE = Net profit margin × Asset turnover × Equity multiplier, where Equity multiplier = Average assets ÷ Average equity.
Example: 6% × 1.20 × (1,000 ÷ 400) = 18%. The 2.5× multiplier shows that ROE reflects the financing structure as well as profit margin and resource use.
Business use and limits: It explains whether higher ROE comes from profitability, sales efficiency or greater leverage. The identity holds when all inputs share the same accounting scope and matching averages; it does not identify the quality of the profit. Odoo reporting can place these agreed components side by side.
20. Return on invested capital (ROIC)
Formula used here: NOPAT ÷ Average invested capital × 100%. NOPAT is net operating profit after tax; our simplified calculation is EBIT × (1 − Operating tax rate).
Example: NOPAT = 120 × (1 − 25%) = 90. ROIC = 90 ÷ 750 × 100% = 12%.
Business use: Compare operating returns with the company's estimated cost of capital. If that cost were 9%, this simplified 12% result would exceed it by 3 percentage points; both inputs need careful estimation. See CFA Institute: Capital Investments and Capital Allocation.
Limits: Define invested capital consistently: for example, operating assets minus non-interest-bearing operating liabilities, or equity plus borrowing less specified non-operating assets. Tax, goodwill, leases and capitalized development can change the result. Do not use 12% as a universal target or apply a generic manufacturer formula to a bank.
Odoo: Prepare mapped operating accounts, average invested capital and NOPAT adjustments in a configured report or BI model. This is a methodology task as well as arithmetic; a generic ROI label does not establish ROIC.
Cash generation: do the reported earnings produce money?
Cash-flow measures complement profitability. Our Odoo Cash Flow Statement guide explains operating, investing and financing flows and the difference between direct and indirect presentations.
21. Operating cash-flow margin
Formula: Operating cash flow ÷ Revenue × 100%.
Example: 90 ÷ 1,200 × 100% = 7.5%.
Business use: Compare the cash produced by ordinary operations with sales, and investigate why growing revenue is not producing more cash.
Limits: Customer prepayments, working-capital swings and delaying supplier payments can temporarily improve it. Cash-flow classifications, including interest, may differ between reporting frameworks. Compare several periods and reconcile significant changes.
Odoo: Use the operating section of the configured Cash Flow Statement and recognized revenue. Review account mappings and reconciliation before relying on the result.
22. Cash conversion of profit
Formula used here: Operating cash flow ÷ Net profit.
Example: 90 ÷ 72 = 1.25×. Operating cash flow is 125% of recognized net profit in this period.
Business use: Investigate earnings quality. Persistently low cash conversion may point to growing receivables, stock accumulation or recognition problems.
Limits: Depreciation and other non-cash charges can legitimately make it exceed 1. Growing businesses can show low conversion while building working capital. Near-zero or negative profit makes the ratio hard to interpret; use a cash bridge instead. Other analysts divide by EBITDA, producing a different measure.
Odoo: Combine Cash Flow Statement and Profit and Loss, then drill into receivables, inventory and payables. The accounts behind the movement matter more than the isolated percentage.
23. Free cash flow (FCF) and FCF margin
Formulas used here: FCF = Operating cash flow − Cash CapEx. FCF margin = FCF ÷ Revenue × 100%.
Example: 90 − 60 = €30,000 FCF; 30 ÷ 1,200 × 100% = 2.5% FCF margin.
Business use: Assess cash remaining after asset investment, before cash uses excluded by this definition. It can inform funding and expansion decisions.
Limits: FCF has no single universal definition; distinguish this simple measure from valuation concepts such as free cash flow to the firm. Acquisitions and debt principal repayments are not deducted here. Negative FCF may reflect deliberate investment, while positive FCF may reflect postponed maintenance. Separate maintenance and growth investment where credible.
Odoo: Combine cash-flow reporting and capital expenditure records; add an explicit reporting line. ERPixel's Direct Cash Flow module article describes additional reporting work, and Cash Flow Budgeting in Odoo addresses planning rather than merely recording history.
Growth and subscription metrics: when traditional ratios need company-specific companions
A recurring-revenue business still needs cash, profit and debt controls. It also needs to distinguish new customer acquisition from retention and expansion. These operating metrics apply where contracts and customer data support their definitions; they should not be imposed on every business.
24. Revenue growth rate
Formula: (Current-period revenue − Comparable prior-period revenue) ÷ Comparable prior-period revenue × 100%.
Example: Revenue rises from €1,000,000 to €1,200,000: (1,200 − 1,000) ÷ 1,000 × 100% = 20%.
Business use: Assess sales momentum alongside margin, cash generation and capital needed for expansion.
Limits: Separate acquisitions, price inflation, currency changes and genuine volume growth. A zero starting value makes the percentage undefined. For October 2026 analysis, compare January–September 2026 with January–September 2025, or matching TTM periods; do not call an annualized estimate a completed-year result.
Odoo: Financial reports support period comparisons. Sales analysis can help explain mix and volume, but orders booked are not identical to recognized revenue.
25. Monthly recurring revenue (MRR) and annual recurring revenue (ARR)
Formulas for a simple subscription model: MRR = Sum of active recurring contract amounts normalized to one month. ARR = MRR × 12.
Example: 100 active customers paying €200 monthly produce €20,000 MRR and €240,000 ARR. An annual €2,400 contract contributes €200 monthly under this normalization.
Business use: Understand the recurring run rate and track expansion, contraction and churn separately.
Limits: ARR is not guaranteed cash or recognized annual revenue. Exclude one-time fees and define treatment of discounts, unpaid contracts and usage-based billing. Revenue recognition still follows the relevant accounting rules.
Odoo: Subscriptions documents MRR Breakdown, MRR Analysis and annualized recurring measures. Verify the contract population and measure semantics. If usage billing lives elsewhere, integrate it rather than estimating it from invoices alone.
26. Net revenue retention (NRR) and gross revenue retention (GRR)
Formulas for the same opening customer cohort: NRR = (Opening recurring revenue + Expansion − Contraction − Churned revenue) ÷ Opening recurring revenue × 100%. GRR uses the same calculation without expansion.
Example: Opening MRR €100,000, expansion €20,000, downgrades €5,000 and churn €10,000 give 105% NRR and 85% GRR. New customers are excluded from both. Stripe explains the NRR/GRR distinction.
Business use: NRR shows whether existing customers expand enough to offset losses; GRR reveals losses that upselling can hide.
Limits: NRR above 100% does not prove all customers are happy. A few large expansions can conceal widespread losses. GRR cannot exceed 100% under this definition. Match time horizon, cohort and currency; usage volatility complicates interpretation.
Odoo: Subscriptions has Retention Analysis and recurring-revenue records. These do not automatically establish that a particular NRR/GRR cohort formula is a standard measure. Configure the cohort calculation and preserve contract changes; external product or billing data may also be required.
27. Customer churn rate
Formula used here: Customers from the opening cohort lost during the period ÷ Customers active at the start × 100%.
Example: Losing 5 of 100 opening customers gives 5% monthly customer churn.
Business use: Investigate retention by product, onboarding cohort and customer segment before spending more on acquisition.
Limits: Customer churn and revenue churn differ. Losing one €10,000 customer is not economically equivalent to losing one €100 customer. Monthly 5% is not the same as annual 5%: at a constant rate, retaining the opening cohort for twelve months gives 0.9512 ≈ 54%, or roughly 46% cumulative loss.
Odoo: Subscription states and contract histories support identifying closures. Agree what counts as churn, a pause, a failed renewal or reactivation; validate period and cohort boundaries in reporting.
28. Customer acquisition cost (CAC) and CAC payback
Formulas used here: CAC = Attributable acquisition sales and marketing costs ÷ New paying customers acquired. CAC payback = CAC ÷ Monthly gross profit per acquired customer.
Example: €30,000 of acquisition costs and 30 new paying customers give €1,000 CAC. Monthly customer revenue of €200 at 70% gross margin gives €140 gross profit; 1,000 ÷ 140 = 7.1 months payback.
Business use: Compare acquisition channels and decide whether the company can fund growth until customer contribution recovers acquisition cost.
Limits: Include the agreed staff and agency costs, not just advertising. Long sales cycles require lag-aware or cohort attribution. Cancellations and changing margins extend realized payback. This gross-profit payback is an estimate, not the exact cash recovery date under annual prepayment.
Odoo: CRM, Sales, Accounting and analytic dimensions can hold customers, campaigns and costs. Attribution and the CAC cohort usually need configuration or integration with advertising and billing data. Our Odoo CRM review explains the sales journey; a conversion rate alone does not measure acquisition economics.
29. Lifetime value to CAC (LTV/CAC)
Simplified gross-profit formula: LTV ≈ Monthly revenue per customer × Gross margin ÷ Monthly customer churn. LTV/CAC = Estimated LTV ÷ CAC.
Example: €200 × 70% ÷ 2% = €7,000 estimated LTV. With €1,000 CAC, the ratio is 7.0×. The 2% churn belongs to this separate hypothetical cohort, not the 5% example above.
Business use: Form a hypothesis about acquisition economics, then validate it with actual cohort gross profit and retention.
Limits: The shortcut assumes stable spending, margin and churn and ignores discounting. Young companies have insufficient history; zero observed churn does not imply infinite value. Using lifetime revenue in one company's numerator and lifetime gross profit in another creates a false comparison. Prefer observed cohorts to optimistic lifetime estimates.
Odoo: Customer and contract records provide inputs; delivery costs need a reliable allocation. A cohort model or BI integration can calculate the agreed version. See Stripe's SaaS metrics overview for further reading.
30. The Rule of 40
Formula for the version used here: Annual recurring-revenue growth percentage + EBITDA margin percentage.
Example: 30% recurring-revenue growth + 15% EBITDA margin = 45 percentage points.
Business use: Provide a compact discussion of growth versus profitability for an appropriate software peer group.
Limits: This is a heuristic, not an accounting standard, solvency test or universal “pass.” Some analysts use FCF margin instead of EBITDA margin; those results are not interchangeable. It can hide weak retention, expensive acquisition or short runway, and is generally unsuitable for ranking a factory against a SaaS company. Bessemer discusses the limitations of the Rule of 40.
Odoo: Combine an explicitly selected recurring-revenue growth measure with the chosen financial margin. The arithmetic is simple; establishing comparable definitions is the substantive work.
31. Cash runway and burn multiple
Formulas used here: Runway = Available unrestricted cash ÷ Expected monthly net cash burn. Burn multiple = Net cash burn during the period ÷ Net new ARR during the same period.
Example: A separate startup has €600,000 available and burns €50,000 monthly: 12 months runway. Over a quarter it burns €150,000 and adds €100,000 net ARR: 1.5× burn multiple.
Business use: Estimate the time available to reach sustainable funding and the cash cost of adding recurring revenue. “Net new ARR” includes the loss of ARR from churn and contraction, not just new sales.
Limits: Flat monthly burn ignores uneven collections, tax and balloon repayments; build a dated cash forecast. Exclude fundraising proceeds from operating burn. Specify whether CapEx and acquisitions count. Burn multiple is not meaningful when net new ARR is zero or negative; a cash-generating business needs a different reading. These measures are amounts-and-time analysis, not a substitute for the Balance Sheet. Craft Ventures describes the burn-multiple framework.
Odoo: Reconciled cash, expected payments and subscription changes provide inputs. Forecasting assumptions and burn definitions require a configured model. ERPixel can add scenario planning and alerts using the reporting and budgeting approach described in our cash-flow budgeting article.
Market multiples: a healthy business and a good purchase price are different questions
Operational ratios describe a business. Valuation multiples compare its price with earnings or another financial base. Two equally healthy companies may trade at different prices because investors expect different growth or risk.
32. Price-to-earnings (P/E)
Formula: Share price ÷ Earnings per share, or Equity market value ÷ Matching earnings attributable to those shareholders.
Example: An equity valuation of €1.8 million and matching annual earnings of €120,000 give 15× P/E.
Business use: Compare earnings valuations of broadly similar profitable companies, or examine an acquisition-price assumption.
Limits: Forward earnings and historical earnings produce different multiples. Negative earnings make conventional P/E unhelpful; one-off profits can make a company look artificially cheap. A private company's price is an assumption or transaction value, not a live market quote. Match share classes and dilution.
Odoo: Accounting can supply the earnings base. Market prices, equity valuations and share-count adjustments are external inputs; they are not inferred from book equity. OpenStax's market-value ratios chapter provides background.
33. Enterprise value / EBITDA
Formula: Enterprise value ÷ Matching annual or TTM EBITDA. A simple EV approximation is equity market value + debt − cash; more complete versions address preferred capital and non-controlling interests.
Example: Equity value €1.5 million, debt €400,000 and cash €100,000 give €1.8 million EV. With €180,000 EBITDA, the multiple is 10×.
Business use: Compare whole-business valuations where capital structures differ, while examining the quality of EBITDA and investment needs.
Limits: Match lease liabilities with the EBITDA basis, and review adjustments. Negative EBITDA makes the conventional multiple unusable. A low multiple can reflect declining earnings or heavy future CapEx. It is not a measure of liquidity or a promise of return.
Odoo: Financial reports can supply debt, cash and an agreed EBITDA reconciliation; valuation data and additional EV adjustments come from outside the ledger.
Which measures should you actually compare in 2026?
The following is our analytical recommendation, not a newly introduced accounting standard or a claimed survey of every investor. Start with the economic model, select relevant peers and combine earnings, cash, capital and risk.
| Business model | Useful comparison set | What needs explanation |
|---|---|---|
| Retail, wholesale and ecommerce | Gross/operating margin; inventory turnover and DIO; DSO/DPO/CCC where relevant; CFO and FCF margin; liquidity and debt service. | Returns, fulfillment costs, product mix, seasonality, stockouts and supplier terms. |
| Manufacturing | Operating margin; ROIC; inventory and work-in-progress cycle; FCF after investment; net debt/EBITDA and DSCR. | Capacity utilization, asset age, maintenance investment, yield and scrap. See OEE and our manufacturing cost-accounting guide. |
| Professional and project services | Operating margin; DSO; CFO conversion; project profitability; revenue relative to staff capacity. | Unbilled work, milestones, subcontracting and realistic utilization. See project profitability and utilization rate. |
| SaaS and subscription services | Recurring growth; NRR and GRR; customer churn; gross margin; CAC payback; FCF margin or runway; applicable debt measures. | Cohorts, delivery/hosting costs, discounts, usage billing and acquisition attribution. Use LTV and Rule of 40 as supplementary views. |
| Asset-heavy businesses | ROIC; operating margin; interest coverage and DSCR; cash-flow generation after maintenance CapEx. | Replacement costs, asset valuation, leases, investment cycle and debt maturities. |
| Banks and insurers | Sector-specific capital, liquidity, risk and profitability measures under their reporting framework. | Their balance sheets and regulation make generic wholesale or SaaS ratios insufficient. Do not apply this article's peer dashboard mechanically. |
For a first dashboard in a non-financial company, select six to eight relevant measures rather than all thirty-three numbered entries. Include a liquidity view, an operating margin, operating cash flow or FCF, a debt-service view if borrowing exists, a return on capital and the model-specific working-capital or customer measure. Review the company's own trend before comparing peers.
A comparison exercise: which wholesaler is stronger?
Assume two fictional wholesalers have the same annual revenue and use comparable accounting, customer terms, products and measurement dates.
| Measure | Wholesaler A | Wholesaler B | Question to investigate |
|---|---|---|---|
| Revenue | €10 million | €10 million | Equal scale does not establish equal health. |
| Revenue growth | 25% | 12% | How much funding does growth require? |
| EBITDA margin | 15% | 12% | Are cost policies and adjustments comparable? |
| DSO | 75 days | 40 days | Is A's extra customer credit agreed, overdue or risky? |
| DIO / DPO | 120 / 45 days | 65 / 40 days | Is the stock difference necessary for availability? |
| CCC | 120 + 75 − 45 = 150 days | 65 + 40 − 40 = 65 days | A carries a substantially longer financing cycle. |
| FCF margin | −2% | 6% | A uses €200,000 net cash after CapEx; B generates €600,000. |
| Net debt / EBITDA | 4.0× | 1.2× | Compare maturities, covenants and ability to refinance. |
A has stronger reported growth and EBITDA margin; B shows stronger cash generation and less leverage in this example. We cannot declare a complete winner without explaining A's investment program and working capital. The ratios identify where to investigate and what management can change.
Stress-test the comparison
Historical ratios describe what happened. Test plausible adverse changes before making a funding decision. In our €1.2 million teaching company, a 15-day increase in DSO ties up approximately €49,315: €1,200,000 ÷ 365 × 15, assuming unchanged sales and collection structure.
If EBITDA falls 20% while net debt stays €380,000, net debt/EBITDA rises from 2.11× to 2.64×: 380 ÷ 144. That sensitivity is useful, but it is not a complete forecast: a real downturn can change cash, stock, debt and margins together. A connected scenario model should reflect those relationships.
How Odoo turns business records into a usable management dashboard
The aim is to avoid rebuilding every calculation by hand each month. With appropriate configuration, posted invoices, vendor bills, payments and other accounting documents generate journal entries and update the ledger. Standard reports summarize that ledger; operational records help explain why the balances changed. Draft documents, missing invoices and incomplete period adjustments can still produce incomplete analysis.
Official Odoo 19 reporting documentation describes Balance Sheet, Profit and Loss, Executive Summary, Aged Receivable, Aged Payable and Cash Flow Statement, including period comparisons and exports. Executive Summary explicitly documents current ratio, gross and net margins, average debtor/creditor days and an annual ROI measure. The names should be mapped to your agreed formulas before external benchmarking.
| Reporting layer | What can be available in Odoo | What needs agreement or extra work |
|---|---|---|
| Accounting | Ledger, financial statements, aging and documented Executive Summary measures. | Localization, account mapping, posting, closing, permissions and comparable formula definitions. |
| Inventory and Purchase | Stock quantities, values, movements, replenishment and purchasing records. | Average inventory, matching COGS, product-level DIO and procurement/finance reconciliation. |
| Sales and CRM | Orders, customers, opportunities and sales context. | Revenue versus orders, credit-sales selection, attribution and CAC allocation. |
| Subscriptions | Subscription Analysis, Retention Analysis, MRR Breakdown and MRR Analysis. | Exact cohort NRR/GRR, churn policy, usage data and acquisition economics. |
| Analytic accounting and financial-report customization | Cost/revenue dimensions and report expressions. | Shared-cost allocation, averages, NOPAT, invested capital and covenant formulas. |
| External BI and custom integrations | Odoo can provide operational and financial inputs to an agreed analytics solution. | Peer data, stock prices, advertising costs, product usage and complete group consolidation adjustments. |
The Odoo financial-report framework supports expressions and arithmetic across report lines. Analytic accounting provides management dimensions. Subscription reporting provides recurring-revenue analysis. Availability depends on Odoo version, edition, installed apps, localization, access rights and configuration; this article does not promise every report in every Community or Online installation.
An important Odoo 19 inventory detail: operational inventory value and the accounting value can differ until the applicable valuation review and closing entry is posted. Therefore, reconcile Inventory and Accounting before calculating financial turnover or gross margin. See official inventory valuation documentation and our linked valuation article.
Where ERPixel can help
As an Official Odoo Partner, ERPixel can help define indicators, configure standard reports, develop custom calculations and integrate missing data. Practical work can include monthly average balances, receivables segmentation, product-level turnover, investor and management reporting, agreed loan covenants, cohort dashboards and forecasts. The deliverable should make the formula and source records traceable.
Custom development is available through ERPixel's Odoo development services, and cross-system analysis can use business intelligence services. Standard configuration should be used where it solves the requirement. The implementation route depends on hosting and the requested logic: arbitrary server-side modules need an environment that supports them, such as Odoo.sh or suitable self-hosting. Odoo Online has custom-module restrictions.
ERP automation does not make an undefined measure meaningful. Management and finance first agree the calculation, scope and decision it supports; ERPixel can then turn that methodology into repeatable reporting.
A beginner's monthly review routine
- Establish reliable records. Reconcile banks, review receivables and payables, reconcile inventory valuation and complete relevant period-close adjustments.
- Fix the comparison basis. Record company/group scope, currency, dates, recognized revenue and reported versus adjusted measures.
- Read profit and cash together. Explain why operating cash flow differs from profit before judging either.
- Find the operational cause. Drill into overdue invoices, product families, supplier terms, customer cohorts or project costs.
- Choose an action and an owner. Examples include collecting disputed invoices, revising replenishment, improving onboarding or restructuring a repayment schedule.
- Check the next period. Observe whether the action improved cash and economics, rather than only improving a dashboard number.
For your first MBA exercise, take two comparable companies, calculate a small relevant set and write one sentence explaining each result. Then ask what extra information could overturn the apparent conclusion. That habit makes ratios useful: they guide questions, operating decisions and funding choices instead of replacing judgment.