Financial Ratio Analyst
This skill turns a set of period-over-period financial statements into a structured ratio analysis: it calculates the standard liquidity, leverage, profitability, efficiency, and coverage ratios, computes period-over-period trends, compares each ratio to a target or benchmark when one is supplied, and writes a plain-language interpretation that names the most likely driver behind each movement. It is built for FP&A analysts, controllers, financial accountants, credit analysts, and anyone doing diligence who needs a defensible first-pass read of a company's financial health without re-deriving formulas every time.
When to use this
- Monthly, quarterly, or annual management reporting where you need a ratio pack with commentary.
- Budget-vs-actual or year-over-year review where you must explain what moved and why.
- Credit assessment or loan/covenant monitoring (e.g. checking a net-debt-to-EBITDA or interest-cover threshold).
- Buy-side or sell-side due diligence requiring a quick but rigorous financial health screen.
- Board or investor packs that need ratios benchmarked against prior periods or peer targets.
Inputs
Provide financial statement line items for at least one period; two or more periods unlock trend analysis. Accepted forms:
- A CSV or Excel extract with one row per line item and one column per period (the preferred layout). See the bundled sample
samples/financials_sample.csv.
- A pasted balance sheet and income statement.
- Optionally, a second small table of target/benchmark values (e.g. covenant limits, peer medians, internal targets).
Minimum line items for a full suite: current assets, inventory, current liabilities, cash and cash equivalents, total assets, total equity, total debt (short- plus long-term borrowings), revenue, COGS, operating profit (EBIT), net income, interest expense, and depreciation/amortisation (for EBITDA). If a line item is missing, compute only the ratios it does not block and clearly mark the rest as "not computed - input missing". State the currency and whether figures are in thousands/millions.
How to do it
Work through the suite in five families. Use exact period-end balances for balance-sheet items; where a ratio mixes a flow (income statement) with a stock (balance sheet), use the average of opening and closing balances when both period-ends are available, and disclose when you fall back to a single period-end. All references below are to publicly available standards (IAS 1 presentation of statements, IAS 2 inventories, IAS 7 cash flows, IFRS 15 revenue, IFRS 16 leases; equivalent US GAAP where noted).
1. Liquidity (can it meet short-term obligations?)
- Current ratio = Current assets / Current liabilities. Healthy is context-specific; <1.0 signals potential short-term strain.
- Quick (acid-test) ratio = (Current assets - Inventory - Prepayments) / Current liabilities. Strips out the least-liquid current assets (IAS 2 inventory).
- Cash ratio = (Cash + cash equivalents) / Current liabilities. The most conservative liquidity view.
- Defensive interval (days) = (Cash + marketable securities + receivables) / (Daily operating cash expenses). Use only if operating expense detail is available.
2. Leverage / Solvency (capital structure and long-run risk)
- Debt-to-equity = Total debt / Total equity. Watch for negative equity, which makes the ratio meaningless - flag it instead of reporting a number.
- Debt-to-assets = Total debt / Total assets.
- Equity ratio = Total equity / Total assets (the complement of debt-to-assets when only debt and equity fund assets).
- Net debt to EBITDA = (Total debt - Cash) / EBITDA, where EBITDA = EBIT + Depreciation + Amortisation. This is the most common leverage covenant metric; note that IFRS 16 grosses up lease liabilities into debt, so reconcile to the covenant's definition (frozen-GAAP vs current) before comparing to a limit.
3. Profitability (how efficiently it earns)
- Gross margin = (Revenue - COGS) / Revenue.
- Operating (EBIT) margin = EBIT / Revenue.
- Net margin = Net income / Revenue.
- Return on equity (ROE) = Net income / Average total equity.
- Return on assets (ROA) = Net income / Average total assets.
- Optional DuPont decomposition: ROE = Net margin x Asset turnover x Equity multiplier. Use it to attribute an ROE move to margin, efficiency, or leverage.
4. Efficiency / Activity (how hard the assets work)
- Asset turnover = Revenue / Average total assets.
- Inventory turnover = COGS / Average inventory; Days inventory outstanding (DIO) = 365 / Inventory turnover.
- Receivables turnover = Revenue / Average receivables; Days sales outstanding (DSO) = 365 / Receivables turnover.
- Payables turnover = COGS / Average payables; Days payable outstanding (DPO) = 365 / Payables turnover.
- Cash conversion cycle (days) = DIO + DSO - DPO. A rising CCC ties up working capital.
5. Coverage (can it service its debt and fixed charges?)
- Interest cover (times) = EBIT / Interest expense. Below ~1.5x-2.0x is typically a red flag; confirm the lender's exact threshold.
- EBITDA interest cover = EBITDA / Interest expense.
- Debt service coverage (DSCR) = (EBITDA - taxes - maintenance capex, or as the agreement defines) / (Interest + scheduled principal). Use the agreement's definition when one is provided.
Trend and benchmark logic
- For each ratio with two+ periods, compute the absolute change and the percentage change vs the prior period; for margins and other percentages, report the change in percentage points, not a percent-of-a-percent (a move from 10% to 12% is +2 pp, not +20%).
- Compare each ratio to its target/benchmark if supplied; mark Pass / Watch / Breach. Define Watch as within 10% of the threshold on the wrong side of comfort, or as the user specifies.
- Flag anomalies: division by zero or near-zero denominators, negative equity or negative EBITDA, sign flips, ratios that move more than a set tolerance (default +/-20% or +/-3 pp) period-over-period, and any ratio that contradicts a related one (e.g. rising sales but falling receivables turnover suggests collection slippage or channel stuffing).
- Name the likely driver using the related line items, not vague language: e.g. "Quick ratio fell from 1.1 to 0.8 driven by a 40% rise in current liabilities (trade payables), while quick assets were broadly flat."
Output
Produce a Markdown workpaper (and, if the user wants it in a spreadsheet, describe a matching CSV/xlsx). Structure:
- Header - entity name, periods covered, currency and scale, basis (IFRS or US GAAP), preparation date, and a one-line "prepared as analysis aid, unaudited" note.
- Ratio table - one row per ratio, grouped by the five families. Columns: Ratio | Formula | Period values (one column each) | Change (abs) | Change (% or pp) | Target/Benchmark | Status (Pass/Watch/Breach/n.a.).
- Commentary - a short paragraph per family interpreting the levels and trends in plain language and naming drivers.
- Flags - a bullet list of anomalies, data gaps, and items needing management explanation.
- Assumptions and limitations - averaging choices, missing inputs, any definitional choices (e.g. how debt was scoped, IFRS 16 treatment).
If outputting CSV: columns family,ratio,formula,<period columns>,change_abs,change_pct_or_pp,benchmark,status,driver_note. Keep one ratio per row so it pivots cleanly in Excel.
Quality checks
- Re-derive at least one ratio per family by hand to confirm the formula and the line-item mapping.
- Confirm flow-over-stock ratios use averages (or that the single-period fallback is disclosed).
- Check the balance sheet ties: assets = liabilities + equity for each period; if it does not, stop and flag the input rather than computing on bad data.
- Distinguish percentage-point changes from percent changes; this is the single most common reporting error.
- Watch denominators: never report a ratio over zero or negative equity/EBITDA without an explicit flag.
- Keep debt scope consistent across periods (same definition of "total debt"); reconcile to the benchmark's definition before judging Pass/Breach.
- Do not invent missing line items or "plug" figures; mark them "not computed - input missing".
- State currency and scale once and keep units consistent throughout.
Worked example
Using samples/financials_sample.csv for Aurora Components Ltd (FY2024 vs FY2025, EUR thousands):
- Current ratio FY2025 = 4,200 / 3,100 = 1.35 (FY2024: 3,800 / 2,500 = 1.52). Down 0.17. Driver: current liabilities rose 24% (trade payables and short-term borrowings) while current assets rose only 11%.
- Quick ratio FY2025 = (4,200 - 1,500 - 400) / 3,100 = 2,300 / 3,100 = 0.74 (FY2024: (3,800 - 1,300 - 300) / 2,500 = 0.88). Below 1.0 - flag as Watch; the inventory build is masking thinner liquid cover.
- Net debt to EBITDA FY2025 = (3,000 - 600) / (1,150 + 450) = 2,400 / 1,600 = 1.50x (FY2024: (2,600 - 750) / (1,240 + 420) = 1,850 / 1,660 = 1.11x). Rising leverage; compare to the covenant limit (sample target 3.0x) - Pass but trending toward Watch.
- Gross margin FY2025 = (12,000 - 8,100) / 12,000 = 32.5% (FY2024: 34.0%). Down 1.5 pp - input cost inflation not fully passed through; confirm with COGS detail.
- Interest cover FY2025 = 1,150 / 220 = 5.2x (FY2024: 6.8x). Comfortable but falling as both EBIT softened and interest expense rose.
The workpaper would then group these, add the remaining ratios, and close with flags (quick ratio < 1, gross margin erosion, rising CCC) and an assumptions note.
Disclaimer
Disclaimer: This skill is a drafting and analysis aid, not professional advice. It does not provide accounting, audit, tax, investment, or legal advice. All output must be reviewed and approved by a qualified professional before use or reliance.
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