Financial Statement Ratios and Analysis
Ratio analysis is tested across multiple CPA exam sections, particularly FAR and BAR. You must know the formulas, what they measure, and how to interpret results. This cheat sheet organizes the most important ratios by category.
Liquidity Ratios
| Ratio | Formula | Measures | Benchmark |
|---|---|---|---|
| Current Ratio | Current Assets / Current Liabilities | Ability to pay short-term obligations | ≥ 2.0 is strong |
| Quick Ratio (Acid Test) | (Cash + Marketable Securities + Net Receivables) / Current Liabilities | Ability to pay short-term obligations without selling inventory | ≥ 1.0 is strong |
| Cash Ratio | (Cash + Cash Equivalents) / Current Liabilities | Most conservative liquidity measure | Varies by industry |
| Working Capital | Current Assets − Current Liabilities | Net short-term financial cushion | Positive is expected |
Profitability Ratios
| Ratio | Formula | Measures |
|---|---|---|
| Gross Profit Margin | (Revenue − COGS) / Revenue | Profitability of core operations before operating expenses |
| Operating Profit Margin | Operating Income / Revenue | Profitability after operating expenses, before interest and taxes |
| Net Profit Margin | Net Income / Revenue | Overall profitability after all expenses |
| Return on Assets (ROA) | Net Income / Average Total Assets | How efficiently assets generate profit |
| Return on Equity (ROE) | Net Income / Average Stockholders' Equity | Return generated on shareholders' investment |
| Earnings Per Share (Basic) | (Net Income − Preferred Dividends) / Weighted Avg. Common Shares Outstanding | Per-share profitability for common shareholders |
DuPont Analysis (ROE Decomposition)
ROE = Net Profit Margin × Asset Turnover × Equity Multiplier
| Component | Formula | Measures |
|---|---|---|
| Net Profit Margin | Net Income / Revenue | Operational efficiency |
| Asset Turnover | Revenue / Average Total Assets | Asset use efficiency |
| Equity Multiplier | Average Total Assets / Average Equity | Financial leverage |
Solvency / Leverage Ratios
| Ratio | Formula | Measures |
|---|---|---|
| Debt-to-Equity | Total Liabilities / Total Stockholders' Equity | Proportion of debt vs. equity financing |
| Debt Ratio | Total Liabilities / Total Assets | Percentage of assets financed by debt |
| Times Interest Earned | EBIT / Interest Expense | Ability to cover interest payments |
| Equity Ratio | Total Equity / Total Assets | Proportion of assets financed by equity |
Efficiency / Activity Ratios
| Ratio | Formula | Measures |
|---|---|---|
| Inventory Turnover | COGS / Average Inventory | How quickly inventory is sold |
| Days in Inventory | 365 / Inventory Turnover | Average days to sell inventory |
| Receivables Turnover | Net Credit Sales / Average Net Receivables | How quickly receivables are collected |
| Days Sales Outstanding | 365 / Receivables Turnover | Average collection period |
| Payables Turnover | COGS / Average Accounts Payable | How quickly payables are paid |
| Asset Turnover | Net Revenue / Average Total Assets | Revenue generated per dollar of assets |
Cash Conversion Cycle
CCC = Days in Inventory + Days Sales Outstanding − Days Payable Outstanding
A shorter CCC means the company converts inventory to cash faster. A negative CCC (common in retail) means the company collects from customers before paying suppliers.
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