This lesson covers the calculation and interpretation of financial ratios to assess an entity’s performance and financial condition .

6.1 Introduction to Ratio Analysis

Ratio analysis is a fundamental technique in financial statement analysis . It involves calculating relationships between financial statement items to assess performance, financial position, and risk. The University of Exeter module describes tools and techniques used in financial analysis, including their uses and limitations . The IBSL curriculum lists ratio analysis as a core component of financial statement analysis . Ratio analysis is essential for making investment, credit, and other economic decisions .

6.2 Key Categories of Financial Ratios

The Swayam course covers ratio analysis over multiple weeks, including liquidity, efficiency, solvency, and profitability ratios .

  • Liquidity Ratios: Assess the ability to meet short-term obligations. Key ratios: current ratio, quick ratio.

  • Efficiency Ratios: Assess how effectively assets are used. Key ratios: accounts receivable turnover, inventory turnover .

  • Solvency Ratios: Assess the ability to meet long-term obligations. Key ratios: debt-to-equity ratio, interest coverage ratio.

  • Profitability Ratios: Assess the ability to generate profits. Key ratios: gross profit margin, net profit margin, return on assets (ROA), return on equity (ROE) .

The Blackbird Training course covers advanced ratio analysis over a full day of training . The Coursera Specialization on Financial Analysis & Reporting covers profitability, liquidity, and solvency ratios .

6.3 DuPont Analysis and Predictive Models

More advanced analysis uses ratio analysis to understand drivers of financial performance. The DuPont model breaks down ROE into three components: profit margin, asset turnover, and financial leverage . This helps identify the drivers of shareholder returns. The Swayam course covers the DuPont model and Altman’s model of bankruptcy as predictive tools .

 

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