• Global Frameworks: CFA Investment Analysis Standards.

1. Liquidity, Solvency, and Efficiency Metrics
Ratios standardize financial data, allowing analysts to compare companies of different sizes across different jurisdictions.
                  ┌───────────────── Ratio Categories ─────────────────┐
                  ▼                                                    ▼
         [Liquidity Metrics]                                  [Solvency Metrics]
   Quick and Current Ratios;                            Debt-to-Equity and Interest
   Measures short-term survival.                         Coverage; Measures default risk.

  • Liquidity Metrics:

    • Current Ratio = Current Assets / Current Liabilities

      Quick Ratio (Acid Test) = (Cash + Short-Term Marketable Securities + Accounts Receivable) / Current Liabilities

  • Solvency Metrics:

    • Debt-to-Equity = Total Interest-Bearing Debt / Total Shareholders’ Equity

      Times Interest Earned (Interest Coverage) = EBIT / Total Interest Expense

      Asset Efficiency Metrics:

    • Receivables Turnover = Credit Sales / Average Accounts Receivable

      Days Sales Outstanding (DSO) = 365 / Receivables Turnover

      Inventory Turnover = COGS / Average Inventory

2. The DuPont Analysis Decomposition Matrix
 
To understand why a company’s Return on Equity (ROE) is changing, analysts break it down using the DuPont model.
The advanced 5-way breakdown isolates exactly which operational or financial lever is driving performance:
 

ROE = (EBIT / Sales) × (Sales / Average Assets) × [(EBIT − Interest) / EBIT] × (Net Income / EBT) × (Average Assets / Average Equity)

This decomposes ROE into five distinct drivers:

ROE = Operating Profit Margin × Asset Turnover × Interest Burden × Tax Burden × Equity Multiplier

 
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