When comparing companies within the same industry, understanding how they stack up financially is crucial. Financial ratios offer a powerful tool for analysts in 2025 to quickly gauge a company’s health and performance relative to its peers. But with so many ratios available, which ones should you focus on? And how do you apply them effectively to get a clear picture? Let’s walk through five key financial ratios that can help you compare industry peers step-by-step, along with practical tips and examples to make your analysis sharp and insightful.
First up is the Current Ratio, a classic liquidity measure that tells you whether a company can cover its short-term obligations with its short-term assets. It’s calculated as current assets divided by current liabilities. For example, a current ratio of 1.5 means the company has $1.50 in current assets for every $1.00 it owes soon. But be careful—what counts as “healthy” varies widely by industry. Airlines might average a current ratio around 0.66, while manufacturing companies often have ratios above 1.5 due to higher inventory needs[1]. When you compare peers, use industry averages as a benchmark but also look at trends over multiple years. If a company’s current ratio has steadily improved from 1.2 to 1.6 over three years, that signals strengthening liquidity, which might give it an edge over competitors with stagnant or declining ratios.
Next, consider the Debt to Equity Ratio, which reveals how much a company relies on debt versus shareholders’ equity to finance its operations. It’s simply total liabilities divided by total equity. A higher ratio means more leverage, which can magnify returns but also risk. For instance, in 2025, the average debt-to-equity ratio in the US is around 0.83, but this varies: capital-intensive industries like utilities tend to carry more debt, while tech companies usually have lower ratios[7]. When comparing peers, watch out for companies with unusually high debt levels—these may be vulnerable if market conditions worsen or interest rates rise. On the flip side, a company with too little debt might be missing out on growth opportunities. Look for a balance that fits the industry context and your risk tolerance.
The Return on Assets (ROA) is another must-have ratio, showing how effectively a company uses its assets to generate profit. Calculated as net income divided by total assets, ROA gives you a sense of operational efficiency. For example, banks in the US reported an average ROA of about 1.16% in early 2025[4]. While that might sound low compared to other sectors, it’s quite typical given the asset-heavy nature of banking. When you compare ROA across peers, focus on whether a company consistently outperforms the industry average. If two software firms have ROAs of 10% and 15%, the latter is generating more profit from its asset base, which could reflect better management or superior products.
Moving on to Profit Margin, this ratio measures how much profit a company keeps from its sales after all expenses. Net profit margin is net income divided by revenue. High profit margins often indicate pricing power or operational efficiency. For example, in sectors like software and pharmaceuticals, margins can be above 20%, whereas retail might see single-digit margins due to intense competition[5]. When comparing peers, analyze margin trends over time and in relation to industry norms. If one company’s margin jumps from 5% to 10% while peers hover around 6%, that might signal a competitive advantage worth investigating.
Finally, the Inventory Turnover Ratio is especially important for industries like retail or manufacturing where inventory management impacts cash flow and profitability. It’s calculated as cost of goods sold divided by average inventory. A higher turnover means inventory sells quickly, reducing holding costs and obsolescence risk. For instance, the average inventory turnover in grocery retail is high because products are perishable, while specialty retail might have lower turnover[3]. When comparing peers, look for companies with turnover ratios that align with or exceed industry standards, indicating efficient inventory control.
To bring these ratios together, here’s a practical way to approach your analysis:
Start with industry benchmarks. Use updated, sector-specific data—like the current ratios for airlines vs. utilities—to set realistic expectations[1][7].
Collect ratios for your target companies. Pull financial statements or use databases like Morningstar or CFMA’s 2025 Benchmarker for reliable figures[2][5].
Compare across the same fiscal periods. This ensures apples-to-apples comparison and accounts for seasonal or economic impacts.
Look beyond single ratios. A company with a great current ratio but poor profitability might be struggling operationally.
Track trends over time. A one-year snapshot is less informative than three to five years of data showing improvement or deterioration.
Add context with qualitative insights. For example, if a company’s debt-to-equity is high but its industry is capital intensive and interest rates are low, that might be acceptable.
Imagine you’re analyzing three manufacturing firms. Firm A has a current ratio of 1.8, debt-to-equity of 0.7, ROA of 8%, profit margin of 12%, and inventory turnover of 6. Firm B shows a current ratio of 1.4, debt-to-equity 1.2, ROA 5%, profit margin 8%, and inventory turnover 4. Firm C has ratios clustered around industry averages but has improved its profit margin steadily over five years. Your analysis might highlight Firm A as financially strong and efficient, Firm B as more leveraged and less profitable, and Firm C as a steady performer with growth potential.
Remember, these ratios are tools, not crystal balls. They help you understand the financial story behind the numbers but don’t replace judgment or deeper due diligence. Market conditions in 2025, like rising interest rates or supply chain shifts, can affect these ratios’ implications. For example, with interest costs higher than in previous years, companies with excessive debt could face headwinds even if their other metrics look solid[6].
To sum up, mastering these five financial ratios—Current Ratio, Debt to Equity, Return on Assets, Profit Margin, and Inventory Turnover—equips you with a clear, practical framework to compare industry peers confidently. Use them to spot strengths, uncover risks, and guide smarter investment or management decisions. As you gain experience, these numbers will start to tell richer stories, helping you look beyond the surface and find the companies best positioned for success in 2025 and beyond.