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Financial Analysis Cheat Sheet by

Links Between Financial Statements

Liquidity Ratios

Current Ratio = Current Assets / Current Liabil­ities
Ability of the firm to cover its short term debts
Quick Ratio = Cash + cash equiv + receiv­ables / Curent Liabil­ities
Ability of the firm to cover its immediate short term debts
Cash Ratio = Cash + Cash Equiva­lents / Curent Liabil­ities
Measures cash available to pay short term debts

Working capital :
Margin of safety to pay current obliga­tions
Current assets – current liabil­ities


Free Cash Flow for a project or a firm: 
= Earnings Before­ In­terest and Taxes (EBIT)
x (1- tax rate) 
+ Deprec­iation
- Changes in working capita­l (­without cash)
- Replac­ement Invest­ments (Capex)
(+ Rec­eip­t from asset sale)

(Note: you can also get free cash flows from operating cash flows + investing cash flows – interest (1-tax%) and adjustment for divide­nds).

Solvency Ratios

Times Interest Earned = Net Income + Interest Exp. +Tax Exp. / Interest Exp.
Shows the firm’s ability to pay the cost of financing
Debt-t­o-E­quity Ratio = Total Liabil­ities / Shareh­older's Equity
Propo­rtion of debt for each “dollar” invested by shareh­olders

Balance Sheet

Income Statement

Profit Margin =
Net Income / Sales Revenue
% of each “dollar” of sales that remains as net income.
Quality of Income =
Cash Flow from Operating Activities / Net Income
Compares the cash flows earned (real) to net income declared (accou­nting princi­ples!)
Fixed Assets Turnover =
Net Sales Revenue / Average Net Fixed Assets
Shows the ability of the firm to use its fixed assets to generate revenue.
Return on Equity =
Net Income / Average Shareh­olders’ Equity
How much income was earned for every “dollar” invested by owners?

ROA (Dupont Chart)



Structure of Income Statement

Return on Asset Ratios

Profit Margin = EBIT x (1-tax) / Net Sales

Asset Turnover = Net Sales / Average Assets

= Profit margin x Asset turnover
= EBIT x (1-tax) / Average Assets

ROCE (return on capital employed) = EBIT x (1 – tax) / Capital Employed
Capital employed
= Total assets – short term liabil­ities OR
= Long term liabil­ities + Equity

Financial leverage: ROE – ROA
Shows the relati­onship between the return on assets (all forms of funding) and the return on equity (only shareh­older’s invest­ment).
Should be positive (indicates that the company creates a bigger return than the cost of borrow­ing).

When return on capital employed is more than the expected return on investment => Value Creation

Investor Ratios

EPS = Net Income* /Average Number of Shares Outsta­nding For The Period
Measures return on investment for shareh­old­ers.
*If there are preferred dividends, the amount is subtracted from net income.

Price-­to-­ear­nings ratio = Current Market Price Per Share / Earnings Per Share
Measures the relati­onship between the current share price and the earnings per share. Indicates market expect­ati­ons.

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