Originally published in Manufacturer, ARB’s Manufacturing Industry newsletter.
Behind every manufacturing company’s production is a complex financial engine. Understanding that engine is critical for your long-term profitability and growth. While financial statements can provide a snapshot of your company’s financial health, benchmarking studies offer the deeper insights needed to interpret that picture and drive smarter decisions.
Ratios That Matter in Manufacturing
Benchmarking starts by identifying relevant metrics and calculating them from your financials. Because manufacturing is asset-intensive, it’s critical to evaluate whether you’re managing assets efficiently — and not taking on too much debt to acquire them.
One key ratio to monitor is your debt-to-assets ratio (total debt divided by total assets). More debt results in a higher ratio. Banks typically consider this ratio when you apply for a business loan. Creditworthy applicants generally have a debt ratio of 1:2 (50%) or less. Lenders won’t necessarily deny highly leveraged companies’ loan applications, but they may offer less favorable loan terms, such as higher interest rates, or require personal guarantees from the owners.
Another key ratio is the return on assets (ROA) (net income divided by total assets). It shows how much profit you’re generating for each dollar invested in total assets. A higher ROA generally means greater efficiency because you’re earning more money on less investment. Additional metrics include the:
- Current ratio (current assets divided by current liabilities), a working capital metric that indicates whether liquid assets are sufficient to meet short-term obligations,
- Quick ratio (cash plus accounts receivable, then divided by current liabilities), a more conservative working capital metric that excludes inventory and prepaid assets, and
- Inventory turnover ratio (annual cost of goods sold divided by inventory), which shows how many times your inventory is sold (or turns over) during the year.
Another useful long-term solvency ratio, the times interest earned ratio, is calculated by dividing net earnings before interest and tax by your interest expense. This reflects your company’s ability to meet interest expenses from operations.
Value of Industry Benchmarking
Financial ratios provide insight into your company’s operations, but how do you know whether your results are good or bad? One option is to compare your company’s current performance with its past performance over time to understand what’s changing. However, benchmarking your performance against others in the manufacturing industry is often more meaningful. This broader perspective is essential for understanding your competitive standing.
Industry benchmarking involves comparing your company’s financial and operational metrics to those of similar manufacturers. This might include businesses of a similar size, geographic region or specialty. By comparing key metrics — such as the debt-to-asset ratio, ROA and inventory turnover rates — you can uncover how well you’re doing relative to your peers. For example, if your ROA trails the industry average by several percentage points, it might be time to examine overhead costs or production efficiency.
Benchmarking also supports strategic goal setting and performance evaluation. For instance, if your debt-to-equity ratio is higher than similar businesses, it may be time to reassess your financing strategies. On the other hand, outperforming your peers can reinforce strategic decisions and provide a compelling story for stakeholders.
Turn Your Insights into Action
While benchmarking studies are powerful tools, their real value lies in applying the findings. Consider conducting a quarterly financial ratio review, tracking trends over time to spot early signs of risk or opportunity. If you work with your financial advisors regularly to analyze your company’s financial ratios, your benchmarking efforts are more likely to be meaningful and reliable.
This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. ©2025
Manufacturing Team Spotlight
Samantha Pedersen joined ARB in 2004 and currently serves as a director. She provides business advisory and attest services primarily to credit unions, commercial businesses, manufacturers, and nonprofit organizations. Sam is responsible for coordinating the training and implementation of Financial Accounting Standards Board (FASB) updates at ARB.
