Financial Statement Analysis Test

Current Ratio — formula

Current Assets ÷ Current Liabilities

Current Ratio — meaning

Ability to pay short-term bills within 12 months.

Quick Ratio — formula

(Cash + Accounts Receivable + Marketable Securities) ÷ Current Liabilities

Quick Ratio — meaning

Ability to pay short-term bills WITHOUT selling inventory.

Cash Ratio — formula

Cash ÷ Current Liabilities

Cash Ratio — meaning

Ability to pay debts using ONLY cash.

Gross Profit Margin — formula

(Sales – COGS) ÷ Sales

Gross Profit Margin — meaning

Profit after producing goods (before operating expenses).

Operating Margin — formula

Operating Income ÷ Sales

Operating Margin — meaning

Measures cost control and operating efficiency.

Net Profit Margin — formula

Net Income ÷ Sales

Net Profit Margin — meaning

How much of each sales dollar becomes profit.

Return on Assets (ROA) — formula

Net Income ÷ Average Total Assets

Return on Assets (ROA) — meaning

How efficiently assets generate profit.

Return on Equity (ROE) — formula

Net Income ÷ Average Shareholders’ Equity

Return on Equity (ROE) — meaning

Return generated for shareholders; boosted by leverage.

Accounts Receivable Turnover — formula

Net Credit Sales ÷ Average Accounts Receivable

A/R Turnover — meaning

How quickly the company collects from customers.

Days Sales Outstanding (DSO) — formula

365 ÷ A/R Turnover

DSO — meaning

Average days customers take to pay; lower is better.

Accounts Payable Turnover — formula

COGS ÷ Average Accounts Payable

A/P Turnover — meaning

How quickly the company pays suppliers.

Days Payable Outstanding (DPO) — formula

365 ÷ A/P Turnover

DPO — meaning

How long the company waits to pay suppliers; higher improves cash flow.

Fixed Asset Turnover — formula

Net Sales ÷ Average Net Fixed Assets

Fixed Asset Turnover — meaning

How efficiently the company uses buildings and equipment.

Debt Ratio — formula

Total Liabilities ÷ Total Assets

Debt Ratio — meaning

Percentage of assets funded by debt.

Debt-to-Equity Ratio — formula

Total Liabilities ÷ Shareholders’ Equity

Debt-to-Equity Ratio — meaning

Amount of leverage the company is using.

Interest Coverage Ratio — formula

EBIT ÷ Interest Expense

Interest Coverage Ratio — meaning

Ability to pay interest on debt; low is risky.

Revenue Growth Rate — formula

(Current Revenue – Prior Revenue) ÷ Prior Revenue

EPS — formula

Net Income ÷ Shares Outstanding

COGS Ratio — formula

COGS ÷ Sales

SG&A to Revenue Ratio — formula

SG&A ÷ Sales

Common-Size Income Statement — definition

Each line item ÷ Total Revenue

Common-Size Income Statement — meaning

Shows expenses and margins as a % of sales for comparison.

Common-Size Balance Sheet — definition

Each line item ÷ Total Assets

Common-Size Balance Sheet — meaning

Shows structure of assets, liabilities, and equity.

High ROE + Low ROA — interpretation

High leverage (lots of debt).

Gross margin high but net income low — interpretation

High SG&A or high interest expenses.

DSO increasing — interpretation

Customers paying slower; weaker liquidity.

DPO increasing — interpretation

Company delaying payments; better cash flow.

Interest coverage decreasing — interpretation

Rising debt or falling earnings; higher risk.

Debt ratio decreasing — interpretation

Paying down debt or assets increasing; lower risk.

Negative net margin but good performance — meaning

Strong cash flow, heavy investment, or high non-cash expenses.

Operating margin falling — interpretation

SG&A rising or worsening cost structure.