Many business owners focus on important numbers such as sales or profits in order to evaluate how well they are doing financially. But to get an accurate view of the entire picture of your business finances, you need to compare numbers to each other through the use of ratios.

"The use of ratios is twofold," says Peter Russo, director of entrepreneurship programs at the Boston University School of Management. "One is you should use it to benchmark yourself against other companies in your industry. You should also use it to compare yourself against your own goals and yourself over time."

To grasp the value of ratios, consider a company that generates a net profit of $200,000. That number means little unless you compare it to the company's sales. A $200,000 profit on $1 million sales likely indicates good financial health. The same profit on $10 million sales, however, would for most companies in most industries suggest poor financial health.

The ratio in this example is net profit margin. This expresses the company's ultimate bottom line as the percentage of gross revenue that end up as net income. The 20 percent net profit margin in the first case is generally a healthy one, while a 2 percent net profit margin is less healthy.

To know for sure, compare your net profit margin to other companies in your industry. Many trade and professional organizations compile figures that help you compare yourself to similar companies. The Risk Management Association's Annual Statement Studies publication contains benchmarks drawn from statements of more than a quarter of a million private companies in hundreds of industries.

Gross profit margin is another useful profitability ratio. Figure it by dividing your gross profit -- sales minus cost of goods -- by your sales. In addition to comparing yourself to other companies, you can use gross profit margin and other profitability ratios to see how you are doing over time. If gross profit margin shrinks, for example, you may have too much inventory on hand. Other helpful profitability ratios include return on assets, which is net income (total revenue minus costs and expenses) divided by total assets, and return on equity, which equals net income divided by the owner's equity.

Other commonly used ratios measure a business's liquidity. Creditors are particularly concerned with liquidity ratios such as the current ratio and the quick ratio or acid test. Current ratio compares the total of your business' current assets with the total of its current liabilities. It's an important measure of a company's cash-generating ability. Many companies are considered in good shape with a current ratio of 2 to 1 or better. You can improve it by using cash to pay off current liabilities.

The quick ratio is similar to the current ratio except that it subtracts inventory from current assets before comparing to current liabilities. Your quick ratio tells you how well you can meet near-term liabilities even if your ability to turn inventory into cash through sales slows down. A quick ratio of 1 to 1 or better usually indicates a healthy short-term outlook. You can boost your quick ratio by selling inventory to generate cash.

There are many more ratios measuring areas such as operations efficiency and solvency. Total asset turnover is an operational ratio that measures how efficiently you use your assets by comparing sales to assets. For this one, the higher the better. Debt-to-equity is a solvency ratio, measured by dividing equity into debt, that helps indicate how risky your financial situation is.

One of Russo's favorites is using the Dupont Formula to calculate return on equity or ROE. To use it, divide sales by total assets. Divide the result of that calculation by net profit margin to get return on equity.

"Your return on equity equals your sustainable growth rate," Russo explains. "If you're going to grow your company at 20 percent a year but your ROE is only 15 percent, you're going to run out of money."

Trying to understand your company's financial position by looking at single numbers is like trying to describe a photograph without referring to the relative positions of elements in the photograph. Small business owners benefit greatly by knowing how they are doing compared to other companies as well as how their results are changing over time. Financial ratios can provide the snapshot to make those analyses simple and accurate.

Mark Henricks is a freelance writer based in Austin, Texas.