A ratio puts one figure over another so size stops mattering and the relationship shows.
The four things they measure
Liquidity — can short-term obligations be met. Current assets against current liabilities — see liquidity ratios.
Solvency — can the business meet its obligations at all over the long run. Chiefly debt to equity and debt service coverage.
Profitability — what is kept from what is earned: gross margin, profit margin, and return on assets or equity, which measure profit against what was invested to produce it.
Efficiency — how hard the assets work. Asset turnover is revenue against assets; inventory turns and days to get paid are the versions that matter to a service business.
How to read them
Against the business's own history, which is the most reliable comparison because the definitions are consistent.
Against the trade, with caution — see service business benchmarks. Published figures vary by source and by how each line was classified.
Never one at a time. A strong margin with weak liquidity is a business that is profitable and cannot pay its bills, and either ratio alone misses it.
Where they mislead
They are computed from the accounts, so they inherit whatever is wrong there. A cost on the wrong line moves several ratios at once — see reading a profit and loss.
And a ratio at one date can be arranged. A balance sheet prepared just after a large receipt looks different from one prepared the week before.
Which ones actually matter to an owner-operator
Gross margin, days to get paid, debt service coverage, and the current ratio. The rest are useful when something specific is being examined.