Key Financial Ratios to Analyse a Tech Company

October 06, 2025

What are Financial Ratios?

Financial ratios are created with the use of numerical values taken from financial statements to gain meaningful information about a company. The numbers found on a company’s financial statements – balance sheet, income statement, and cash flow statement – are used to perform quantitative analysis and assess a company’s liquidity, leverage, growth, margins, profitability, rates of return, valuation, and more.

Insights for Investors and Analysts:

Analysing a technology company requires a focus on various financial ratios to assess performance, profitability, and overall health. These ratios offer insights into different aspects of the company's operations and financial status. You should focus on a mix of profitability, growth, efficiency, valuation, and liquidity ratios. Below are key financial ratios crucial for evaluating tech companies, along with their formulas.

1. Profitability Ratios:

Gross Profit Ratio:

The Gross Margin Ratio is a profitability metric that shows how much profit a company makes after deducting the cost of goods sold (COGS) from its revenue. It helps assess how efficiently a company produces and sells its products or services.

Formula: Gross Margin Ratio = ((Revenue - COGS) / Revenue) * 100

High gross margin means strong pricing power or efficient operations software companies often have margins of 70–90%.

Operating Profit Ratio (EBITA):

The Operating Margin Ratio measures how much profit a company makes from its core business operations before interest and taxes, relative to its revenue. It's a key indicator of operational efficiency.

Formula: Operating Margin = (Operating Profit / Revenue) * 100

Where: Operating Profit = Revenue – Operating Expenses (like COGS, salaries, R&D, rent, etc.). Excludes: Interest, taxes, and non-operating income/expenses.

High margin = efficient operations and strong control over costs. Software companies often have higher operating margins (20–40%+), due to low marginal costs.

Net Profit Ratio (PAT):

The Net Profit Margin shows the percentage of revenue that remains as net profit (after all expenses), including operating costs, interest, taxes, and one-time charges. It reflects the bottom-line profitability of a business.

Formula: Net Profit Margin = (Net Profit / Revenue) * 100

It reflects overall financial health and efficiency. High net margins indicate strong pricing power and scalability.

Return on Equity (ROE):

Return on Equity (ROE) measures how efficiently a company uses its shareholders’ equity to generate net profit. It’s a key indicator of a company’s ability to deliver returns to its investors.

Formula: ROE = (Net Income / Shareholders’ Equity) * 100

High ROE = efficient use of capital to grow profits. Tech companies with strong brand, IP, or network effects often have high ROE.

2. Growth Ratios:

Revenue Growth Ratio:

The Revenue Growth Ratio measures the percentage increase (or decrease) in a company’s revenue over a specific period—usually year-over-year (YoY). It’s a key indicator of a company’s ability to expand its business and market presence.

Formula: Revenue Growth(%) = ((Current Period Revenue - Previous Period Revenue) / Previous Period Revenue) * 100

Consistent growth indicates strong product-market fit, customer demand, and scalability. Declining growth may be a red flag—unless the company is mature and focusing on profitability.

Earnings Growth Ratio:

The Earnings Growth Ratio shows how much a company's net income (earnings) has increased or decreased over a specific period—typically measured year-over-year (YoY). It helps assess the profit growth trajectory of a business.

Formula: Earnings Growth(%) = ((Current Period Net Income - Previous Period Net Income) / Previous Period Net Income) * 100

Helps investors assess whether cost controls and scaling efforts are effective. More stable, mature tech firms may show slower but more consistent growth.

Customer Growth & ARPU (Average Revenue Per User):

Both Customer Growth and ARPU are key operational metrics, especially for tech, SaaS, telecom, and platform-based companies. They give deep insights into user base expansion and monetization efficiency.

1. Customer Growth Rate:

This metric tracks the increase in number of customers or active users over time.

Formula: Customer Growth (%) = ((Current Period Users - Previous Period Users) / Previous Period Users) * 100

2. ARPU (Average Revenue Per User):

This metric measures how much revenue is generated from each user, on average. It's vital for understanding monetization quality.

Formula: ARPU = Total Revenue / Number of Active Users

• High customer growth with stable or rising ARPU = strong business momentum.
• If ARPU is falling, it could indicate pricing pressure or low-value users.
• Investor focus: SaaS firms and digital platforms are often judged by their ability to grow both users and revenue per user.

CAC (Customer Acquisition Cost) Ratio:

The CAC Ratio helps assess how efficiently a company is spending to acquire new customers, especially important for SaaS, fintech, e-commerce, and subscription-based tech businesses. It compares sales and marketing spending to revenue generated from new customers.

Formula: CAC Ratio = New Annual Recurring Revenue / Sales & Marketing Expenses from Prior Period

Example (SaaS Company):

• New ARR from Q1 = ₹10 crore
• Sales & Marketing in Q4 (previous) = ₹5 crore
• CAC Ratio = 10 / 5 = 2.0

Interpretation: For every ₹1 spent on acquiring customers, the company is generating ₹2 in ARR — strong efficiency.

Ideal Benchmarks:

• CAC Ratio > 1 = Efficient (more revenue than cost)
• CAC Ratio < 1 = Inefficient (spending more to acquire than they earn)

3. Liquidity & Solvency Ratios:

Current Ratio:

The Current Ratio is a liquidity ratio that measures a company’s ability to pay its short-term obligations (due within a year) using its short-term assets. It reflects the firm’s short-term financial health.

Formula: Current Ratio = Current Assets / Current Liabilities

If Current Ratio is:

• > 1.0 = Healthy (company can cover liabilities with assets)
• < 1.0 = Risky (may struggle to meet short-term debts)

Debt To Equity Ratio:

The Debt-to-Equity (D/E) Ratio measures a company’s financial leverage by comparing its total debt to shareholders' equity. It shows how much debt the company uses to finance its operations relative to its own capital.

Formula: Debt-to-Equity Ratio = Total Debt / Shareholders’ Equity

If D/E is:

• < 1.0 = Conservative financing (more equity-funded)
• > 1.0 = Higher leverage (more debt-funded; higher risk)

Ideal D/E varies by industry.

4. Efficiency Ratio:

Asset Turnover Ratio

The Asset Turnover Ratio measures how efficiently a company uses its assets to generate revenue. It tells you how much revenue is produced for every ₹1 of assets.

Formula: Asset Turnover Ratio = Revenue / Average Total Assets

Where: average total assets = (Assets at beginning of year + end of year) / 2

Higher ratio = efficient use of assets. Lower ratio = underutilization of resources or asset-heavy operations.

Account Receivable Ratio:

The Receivable Turnover Ratio measures how efficiently a company collects its accounts receivable (money owed by customers). It shows how many times a company collects its average receivables in a given period (usually a year).

Formula: Receivable Turnover = Net Credit Sales / Average Accounts Receivable

Where: Average Accounts Receivable = (Accounts Receivable at the beginning of the period + Accounts Receivable at the end of the period) / 2

High turnover = Efficient collection (quick to get paid). Low turnover = Slow collection (risk of bad debts, liquidity issues). Tech Companies Typically have higher receivable turnover since customers pay for subscriptions in advance or on a regular basis.

5. Valuation Ratio:

Earning Per Share(EPS):

Earnings Per Share (EPS) is a financial metric that indicates the portion of a company's profit allocated to each outstanding share of common stock. It is commonly used by investors to assess a company's profitability.

Formula: EPS = (Net Income - Preferred Dividends) / Weighted Average Number of Common Shares Outstanding

Types of EPS:

• Basic EPS – Uses the actual number of outstanding shares.
• Diluted EPS – Accounts for all convertible securities (e.g., stock options, convertible debt) that could potentially dilute earnings per share.

Why EPS Matters in Tech:

• Investors watch EPS growth closely to gauge performance.
• For startups or early-stage tech firms, EPS may be negative, which is why other metrics (like revenue growth or cash flow) are also considered.

Price to Earnings (P/E) Ratio:

P/E ratio (Price-to-Earnings ratio) is a financial metric used to evaluate a company's stock price relative to its earnings. It tells you how much investors are willing to pay for each ₹1 of a company’s earnings.

Formula: P/E Ratio = Market Price per Share / Earnings per Share (EPS)

• High P/E: Investors expect high growth in the future (can also mean the stock is overvalued).
• Low P/E: May indicate undervaluation or lower future growth expectations.

PEG (Price/Earnings to Growth) Ratio:

The PEG Ratio adjusts the P/E (Price-to-Earnings) ratio by factoring in the company's earnings growth rate, offering a more complete view of valuation relative to growth.

Formula: PEG Ratio = P/E Ratio / Earnings Growth Rate (%)

Where:

• P/E = Share Price / Earnings Per Share (EPS)
• Earnings Growth Rate = Expected or historical annual EPS growth (in %)

⚠️ Note: Always express the growth rate as a whole number, not a decimal (e.g., 20% → use 20, not 0.20)

• PEG < 1 = Undervalued relative to growth (ideal for growth investors)
• PEG ≈ 1 = Fairly valued
• PEG > 1 = Overvalued relative to growth

Conclusion:

Evaluating a tech company requires understanding various financial ratios. Each ratio provides insights into different performance aspects. By examining these ratios, investors and analysts can make informed decisions about the company's financial health and prospects.