When working with clients on ERPNext, the Financial Ratios report is one of those reports that looks simple, but it actually gives strong insight if you read it properly.

I wrote this as a reference for myself first. Over time I noticed the same questions repeat, what each ratio means, how ERPNext calculates it, and why sometimes the numbers don’t match expectations.

This guide explains the report in a practical way, based on how it behaves inside ERPNext.

Where to find the Financial Ratios report in ERPNext

Go to: Accounts → Reports → Financial Ratios

You will need to select:

• Company
• From Fiscal Year
• To Fiscal Year

The report works on yearly basis only. There is no monthly or quarterly breakdown here. This is important because the main purpose is comparison across years.

How the report is structured

The layout is simple. The first column shows the name of the ratio. Each column after that represents a fiscal year.

So if you select 2022 to 2024, you will see three columns side by side. This helps you track trends instead of looking at one isolated number.

All values are calculated from GL Entries. So if the data in accounting is wrong, this report will also be wrong.

One small detail that is easy to miss. If ERPNext tries to divide by zero, it does not show an error. It simply returns 0. This can hide issues, so it’s better to double check if you see unexpected zeros.

Liquidity Ratios (Short-Term Health)

1. Current Ratio

Formula
Current Assets / Current Liabilities

ERPNext Logic
Uses accounts with type “Current Asset” and “Current Liability”

What it Means
Ability of the company to pay short-term obligations

Practical Note
If value is below 1, it usually indicates cash flow issues

2. Quick Ratio

Formula
(Cash + Bank + Receivables) / Current Liabilities

ERPNext Logic
Includes only:
• Bank accounts
• Cash accounts
• Receivable accounts
Excludes inventory

What it Means
Ability to pay obligations using only liquid assets

Practical Note
Important when company has high inventory but low cash

Solvency Ratios (Long-Term Stability)

3. Debt Equity Ratio

Formula
Total Liabilities / Shareholder Fund

ERPNext Logic
Shareholder Fund = Total Assets – Total Liabilities

What it Means
How much the company depends on debt vs owner investment

Practical Note
If this increases every year, financial risk is increasing

4. Gross Profit Ratio

Formula
(Net Sales – COGS) / Net Sales

ERPNext Logic
• Net Sales = Direct Income
• COGS = Cost of Goods Sold

What it Means
Profit remaining after cost of goods

Practical Note
Drop in this ratio usually means pricing issue or cost increase

5. Net Profit Ratio

Formula
Profit After Tax / Net Sales

ERPNext Logic
Profit After Tax = Total Income – Total Expense

What it Means
Final profitability after all expenses

Practical Note
Good indicator, but should not be used alone

6. Return on Assets (ROA)

Formula
Profit After Tax / Total Assets

What it Means
How efficiently assets are used to generate profit

Practical Note
Low value may indicate underutilized assets

7. Return on Equity (ROE)

Formula
Profit After Tax / Shareholder Fund

What it Means
Return generated on shareholder investment

Practical Note
Can appear high if equity is low, so always compare with Debt Equity Ratio

Turnover Ratios (Operational Efficiency)

Important Note
ERPNext uses average values

Average Formula
(Opening Balance + Closing Balance) / 2

Opening balance is taken as one day before the period start

8. Fixed Asset Turnover

Formula
Net Sales / Total Assets

What it Means
Revenue generated per unit of asset

Practical Note
Low value indicates assets are not generating enough sales

9. Debtor Turnover

Formula
Net Sales / Average Receivables

What it Means
How quickly customers pay

Practical Note
Low ratio means delayed collections and cash flow issues

10. Creditor Turnover

Formula
Direct Expense / Average Payables

What it Means
How quickly the company pays suppliers

Practical Note
Very high ratio may indicate tight cash usage

11. Inventory Turnover

Formula
COGS / Average Stock

What it Means
How fast inventory is sold and replaced

Practical Note
Low ratio indicates slow-moving or excess inventory

Important Limitations

The following are NOT included in this report:

• Net Working Capital (NWC)
• Sales Growth Rate

These must be calculated separately or added through customization