1.2.1 Ratios

1.2.1 Ratios

Ratios are central to financial analysis.

Why are ratios so important?  In short, ratios make numbers meaningful by providing comparability across companies and time.  Coca-Cola’s Net Income for 2015 was $7.3 billion.  Is that a lot of money for them? Is that a good number?  It’s hard to tell without context.  Alternatively, knowing that Coca-Cola’s Net Income was 16% of its Revenue (Net Income/Revenue) is much more helpful.  Likewise, knowing that Coca-Cola has $64 billion in Liabilities may not mean very much; knowing that 71% of its Assets are financed with Liabilities (Liabilities/Assets) tells us a lot more about that company. Now, we can compare those ratios to other companies’ ratios and to previous performance.

 

Grouping Ratios

Below are many of the financial ratios that appear in the Selected Financial Data section. Which of these go together? Group the ratios into four categories – Liquidity, Financing (we’ll sometimes call this Leverage), Productivity or Profitability.  Don’t worry if you have no idea what the ratio is saying – think about the two things it’s comparing and make your best guess.  We’ll go over each of them in detail in a moment, so it’s ok to be wrong.

Click and drag each of the ratios into the proper bucket.

 

 

ITEMS

CATEGORY

Financing
CURRENT ASSETS / CURRENT LIABILITIES
TOTAL DEBT / TOTAL ASSETS
Productivity
LONG-TERM DEBT / CAPITALIZATI-
ON
Profitability
INVENTORY TURNOVER
NET PROFIT / REVENUE
NET PROFIT / TOTAL ASSETS
TOTAL ASSETS / NET WORTH
NET PROFIT / NET WORTH
Liquidity
CASH AND MARKETABLE SECURITIES, ACCOUNTS RECEIVABLE / CURRENT LIABILITIES
RECEIVABLES COLLECTION PERIOD (DAYS)
REVENUE / TOTAL ASSETS