ratio-analysis

name	ratio-analysis
description	Financial ratio analysis — liquidity, profitability, leverage, efficiency, valuation ratios with industry benchmarks and Altman Z-Score.
tags	["finance","ratios","liquidity","profitability","leverage","efficiency","valuation","altman","z-score","benchmarks"]

Financial Ratio Analysis Skill

When to Use This Skill

Use this skill when the user asks for:

• Financial ratio computation (current ratio, ROE, D/E, margins, etc.)
• Industry benchmarking or peer comparison
• Credit analysis or distress screening (Z-Score)
• DuPont decomposition (see also three-statement skill)
• Ratio trend analysis across periods

1. Liquidity Ratios

Ratio	Formula	Interpretation
Current Ratio	Current Assets / Current Liabilities	>1.5 healthy; >3.0 may be inefficient
Quick Ratio	(Cash + ST Investments + AR) / Current Liabilities	Strips inventory; >1.0 is threshold
Cash Ratio	(Cash + Cash Equivalents) / Current Liabilities	Most conservative; 0.2-0.5 typical
Operating CF Ratio	Cash from Operations / Current Liabilities	Best liquidity measure; >1.0 is strong

2. Profitability Ratios

Ratio	Formula	Notes
Gross Margin	(Revenue - COGS) / Revenue	SaaS: 70-85%, Manufacturing: 25-40%
Operating Margin	EBIT / Revenue	Software: 20-35%, Retail: 3-8%
Net Margin	Net Income / Revenue	Most susceptible to one-time items
ROE	Net Income / Avg Equity	15-20%+ is strong; decompose via DuPont
ROA	Net Income / Avg Total Assets	Banks: 1-2%, Tech: 10-20%
ROIC	NOPAT / Invested Capital	Gold standard (McKinsey). Compare to WACC

ROIC detail:

NOPAT = EBIT x (1 - Tax Rate)
Invested Capital = Total Equity + Total Debt - Cash

3. Leverage Ratios

Ratio	Formula	Notes
Debt-to-Equity	Total Debt / Total Equity	<1.0 conservative; utilities 1.5-3.0
Debt-to-Assets	Total Debt / Total Assets	>0.6 is aggressive
Interest Coverage	EBIT / Interest Expense	<1.5 distress; >8 very safe
DSCR	EBITDA / (Interest + Principal)	>1.25 typical covenant threshold

4. Efficiency Ratios

Ratio	Formula	Notes
Asset Turnover	Revenue / Avg Total Assets	Retail: 2-3x, Utilities: 0.3-0.5x
Inventory Turnover	COGS / Avg Inventory	Higher = faster sales
DSO	365 / (Revenue / Avg AR)	30-45 days typical B2B
DIO	365 / (COGS / Avg Inventory)	Rising DIO = overstocking risk
DPO	365 / (COGS / Avg AP)	Higher = holding cash longer
Cash Conversion Cycle	DIO + DSO - DPO	Negative = collect before paying (Amazon)

5. Valuation Ratios

Ratio	Formula	Notes
P/E	Market Cap / Net Income	S&P median ~16-18x; negative earnings = N/A
EV/EBITDA	Enterprise Value / EBITDA	Capital-structure neutral; preferred for M&A
P/B	Market Cap / Total Equity	Banks valued on P/B (1.0-1.5x typical)
P/S	Market Cap / Revenue	Useful when earnings negative; most abused

Enterprise Value:

EV = Market Cap + Total Debt - Cash + Minority Interest + Preferred Stock

6. Industry Benchmarks

Ratio	Tech/SaaS	Manufacturing	Retail	Banking	Utilities
Current Ratio	2.0-4.0	1.5-2.5	1.0-1.5	N/A	0.5-1.0
Gross Margin	70-85%	25-40%	25-35%	N/A	40-60%
Operating Margin	20-35%	8-15%	3-8%	30-45%	15-25%
ROE	15-30%	10-20%	15-25%	8-15%	8-12%
D/E	0-0.5	0.5-1.5	0.5-1.5	5-12	1.0-2.5
P/E	25-50	12-20	12-20	8-14	14-20
EV/EBITDA	15-25	8-12	6-10	N/A	8-10

Note: Banking uses Net Interest Margin, Efficiency Ratio, Tier 1 Capital instead of many standard ratios.

7. Altman Z-Score

Public Manufacturing Firms

Z = 1.2*X1 + 1.4*X2 + 3.3*X3 + 0.6*X4 + 1.0*X5

Variable	Formula
X1	Working Capital / Total Assets
X2	Retained Earnings / Total Assets
X3	EBIT / Total Assets
X4	Market Value of Equity / Total Liabilities
X5	Sales / Total Assets

Zones: Safe > 2.99 | Grey 1.81-2.99 | Distress < 1.81

Private Firms (Z'-Score)

Z' = 0.717*X1 + 0.847*X2 + 3.107*X3 + 0.420*X4' + 0.998*X5

Where X4' = Book Value of Equity / Total Liabilities. Cutoffs: Safe > 2.90, Distress < 1.23.

Non-Manufacturing (Z''-Score)

Z'' = 6.56*X1 + 3.26*X2 + 6.72*X3 + 1.05*X4'

Drops Sales/Assets (industry-dependent). Cutoffs: Safe > 2.60, Distress < 1.10.

8. SQL Patterns

-- Comprehensive ratio computation
WITH pivoted AS (
    SELECT period,
        MAX(CASE WHEN line_item = 'Revenue' THEN amount END) AS revenue,
        MAX(CASE WHEN line_item = 'COGS' THEN amount END) AS cogs,
        MAX(CASE WHEN line_item = 'Net Income' THEN amount END) AS net_income,
        MAX(CASE WHEN line_item = 'EBIT' THEN amount END) AS ebit,
        MAX(CASE WHEN line_item = 'Interest Expense' THEN amount END) AS interest_expense,
        MAX(CASE WHEN line_item = 'Total Assets' THEN amount END) AS total_assets,
        MAX(CASE WHEN line_item = 'Total Current Assets' THEN amount END) AS current_assets,
        MAX(CASE WHEN line_item = 'Total Current Liabilities' THEN amount END) AS current_liabilities,
        MAX(CASE WHEN line_item = 'Total Equity' THEN amount END) AS total_equity,
        MAX(CASE WHEN line_item = 'Total Debt' THEN amount END) AS total_debt,
        MAX(CASE WHEN line_item = 'Inventory' THEN amount END) AS inventory,
        MAX(CASE WHEN line_item = 'Accounts Receivable' THEN amount END) AS ar,
        MAX(CASE WHEN line_item = 'Cash' THEN amount END) AS cash
    FROM s_financials GROUP BY period
),
with_lag AS (
    SELECT *,
        LAG(total_assets) OVER (ORDER BY period) AS prev_assets,
        LAG(total_equity) OVER (ORDER BY period) AS prev_equity
    FROM pivoted
)
SELECT period,
    -- Liquidity
    current_assets / NULLIF(current_liabilities, 0) AS current_ratio,
    (cash + ar) / NULLIF(current_liabilities, 0) AS quick_ratio,
    -- Profitability
    (revenue - cogs) / NULLIF(revenue, 0) AS gross_margin,
    ebit / NULLIF(revenue, 0) AS operating_margin,
    net_income / NULLIF(revenue, 0) AS net_margin,
    CASE WHEN (total_equity + COALESCE(prev_equity, total_equity))/2 > 0
         THEN net_income / ((total_equity + COALESCE(prev_equity, total_equity))/2)
         ELSE NULL END AS roe,
    net_income / NULLIF((total_assets + COALESCE(prev_assets, total_assets))/2, 0) AS roa,
    -- Leverage
    total_debt / NULLIF(total_equity, 0) AS debt_to_equity,
    ebit / NULLIF(interest_expense, 0) AS interest_coverage,
    -- Efficiency
    365.0 / NULLIF(revenue / NULLIF(ar, 0), 0) AS dso,
    365.0 / NULLIF(cogs / NULLIF(inventory, 0), 0) AS dio
FROM with_lag
ORDER BY period;

Common Pitfalls

• Negative equity: Suppresses ROE. Use ROIC instead. Flag for user.
• COGS = 0: Service/financial companies don't report COGS. Gross margin undefined.
• One-time items: Restructuring, impairments crater net income. Flag NI-to-EBIT divergence.
• Snapshot vs flow: Always average BS denominators for ROE, ROA, turnover ratios.
• Stock-based comp: 10-30% of revenue in tech. Report margins with and without SBC if available.
• Cash hoarding: Excess cash inflates invested capital, deflates ROIC. Consider net invested capital.

Red Flag Detection

Flag any of these automatically:

• Z-Score in distress or grey zone
• Interest coverage below 2.0x
• Negative or rapidly declining operating cash flow
• DSO increasing faster than revenue growth
• D/E above industry norms and rising
• Declining gross margins for 3+ consecutive periods