When you’re looking to compare companies across different industries in 2025, relying solely on raw financial numbers can be misleading. Industries vary widely in their capital needs, growth prospects, and risk profiles, so a dollar earned or a debt held in one sector doesn’t necessarily carry the same weight in another. That’s where financial ratios come in. By distilling complex financial statements into standardized metrics, ratios allow you to level the playing field and make smarter, apples-to-apples comparisons. Here, I’ll walk you through five key financial ratios that work well across industries, how to interpret them, and practical tips to apply them effectively in your analysis.
1. Price-to-Earnings Ratio (P/E): Gauging Market Expectations
The Price-to-Earnings ratio remains one of the most popular tools for investors trying to understand how the market values a company relative to its current earnings. It’s calculated by dividing the company’s current stock price by its earnings per share (EPS).
P/E = Market Price per Share ÷ Earnings per Share
In simple terms, a higher P/E suggests investors expect higher future growth, while a lower P/E might indicate undervaluation or potential trouble. But here’s the catch—what’s considered a “normal” P/E varies widely by industry. For example, tech companies often sport high P/E ratios reflecting rapid growth, while utilities typically have lower P/Es due to their stable but slower growth.
Practical advice: When comparing companies across industries, use P/E as a starting point but always contextualize it. Look at the industry average P/E, then consider how your target company measures up. A tech firm with a P/E of 25 might be reasonable, whereas the same P/E in a mature manufacturing firm could be a red flag. Also, watch out for companies with negative earnings—they won’t have meaningful P/E ratios, so you’ll need to use other metrics.
2. Debt-to-Equity Ratio (D/E): Understanding Financial Risk
The Debt-to-Equity ratio reveals how much a company relies on debt to finance its operations compared to shareholders’ equity.
D/E = Total Liabilities ÷ Shareholders’ Equity
A high D/E means more debt, which can amplify returns but also increase risk, especially if cash flows falter or interest rates rise. This ratio is heavily influenced by industry norms. Capital-intensive industries like construction or utilities often carry higher D/E ratios than sectors like software or services.
For example, a utility company with a D/E of 2 might be standard, reflecting steady infrastructure investment. But a tech startup with the same ratio could signal over-leverage and financial stress.
Actionable tip: When comparing companies, check the industry benchmark D/E ratio. If a company is significantly above the norm, dig into why—is it investing aggressively for growth, or is it struggling to cover existing obligations? Also, consider the company’s interest coverage ratio (not covered here but useful) to assess if its earnings comfortably cover interest payments.
3. Return on Equity (ROE): Measuring Profitability from Shareholders’ Perspective
Return on Equity measures how effectively a company uses shareholders’ funds to generate profit.
ROE = Net Income ÷ Shareholders’ Equity
It’s a straightforward indicator of profitability, telling you how many dollars of profit a company generates for every dollar invested by shareholders.
Here’s the nuance: ROE varies by industry due to different capital structures and profit margins. Financial institutions often have ROEs in the 10–15% range, while tech companies may achieve higher ROEs thanks to lower capital needs and higher margins.
Example: A consumer goods company with an ROE of 20% is likely very efficient at generating profits, but a manufacturing company with 10% might be doing just fine given industry standards.
Pro tip: When comparing companies, use ROE alongside other metrics. A high ROE driven by excessive leverage can be risky, so pair it with the debt-to-equity ratio. Also, look at ROE trends over time to see if profitability is stable, improving, or deteriorating.
4. Current Ratio: Assessing Short-Term Liquidity
The Current Ratio measures a company’s ability to cover short-term liabilities with short-term assets.
Current Ratio = Current Assets ÷ Current Liabilities
A ratio above 1 generally means a company can meet its short-term obligations, but what’s considered healthy can vary. Retail businesses might have lower current ratios due to fast inventory turnover, whereas manufacturing companies often keep higher ratios to buffer against supply chain risks.
For instance, a current ratio of 1.5 is solid for most industries, but a current ratio of 3 could suggest excess inventory or inefficient use of assets.
Actionable insight: Use the current ratio to spot liquidity concerns, but don’t take it at face value. Also consider the quick ratio, which excludes inventory, to understand how quickly assets can convert to cash. Comparing current ratios across industries requires adjusting expectations; what’s safe in one sector might be inadequate in another.
5. Price-to-Book Ratio (P/B): Valuing Assets Relative to Market Price
The Price-to-Book ratio compares a company’s market value to its book value (the net asset value on the balance sheet).
P/B = Market Price per Share ÷ Book Value per Share
This ratio helps identify whether a company is undervalued or overvalued based on its assets. Asset-heavy industries like banking and manufacturing often have P/B ratios close to 1, while companies with significant intangible assets (like software firms) can have much higher P/B ratios.
Example: A bank trading at a P/B of 0.8 might signal undervaluation or underlying problems, whereas a tech company with a P/B of 5 could reflect investor expectations of future growth.
Practical advice: Use P/B to find potential bargains or overvalued stocks but remember that book value might not capture intangible assets or growth potential. Always compare P/B ratios against industry averages and look deeper into what assets the company holds.
Putting It All Together: A Real-World Approach
Imagine you’re evaluating two companies for investment—Company A is a tech startup, and Company B is a manufacturing firm. Company A has a P/E of 30, D/E of 0.5, ROE of 25%, current ratio of 2, and P/B of 6. Company B shows a P/E of 12, D/E of 2, ROE of 12%, current ratio of 1.3, and P/B of 1.2.
At first glance, Company A looks more expensive but has lower debt and higher profitability. Company B is cheaper but carries more debt and lower returns. Without industry context, it’s hard to judge. But knowing tech companies typically have higher P/Es and P/Bs and lower D/E ratios, these numbers align with expectations. Meanwhile, manufacturing firms tend to have lower P/Es and higher leverage due to capital needs.
This example shows how the ratios paint a clearer picture when combined with industry knowledge.
Additional Tips for Using Financial Ratios in 2025
Always benchmark ratios against industry averages—financial databases and benchmarking tools are widely available and provide up-to-date metrics tailored to sectors.
Look beyond a single ratio. A holistic view combining liquidity, profitability, leverage, and valuation ratios gives a balanced assessment.
Track ratio trends over time. One-off ratios can be misleading. Consistent improvement or deterioration tells you more about company health.
Be mindful of accounting differences. Some industries apply different accounting standards that can affect metrics like book value or earnings.
Consider macroeconomic context. Interest rates, inflation, and regulatory changes in 2025 can influence leverage and profitability ratios.
Why These Five Ratios Matter More Than Ever
In a business environment that’s evolving rapidly—with technological disruptions, supply chain challenges, and shifting consumer preferences—these five financial ratios provide a solid framework for navigating complexity. They’re simple enough to calculate and interpret yet powerful enough to reveal insights that raw numbers hide. Whether you’re an investor, manager, or analyst, mastering these ratios will help you make smarter decisions and better understand how companies stack up, no matter their industry.
So next time you’re faced with the daunting task of comparing companies across sectors, remember to start with these five ratios. They’ll give you a clearer view and help you cut through the noise, turning data into actionable knowledge.