Financial ratios from the balance sheet
Analyzing Financial Statements in Python
Rohan Chatterjee
Risk modeler
Current ratio
- Proportion of current assets to current liabilities
- Measure of company's ability to meet short-term burdens
- Ratio greater than one considered good
Formula:
$$\dfrac{\text{Current assets}}{\text{Current liabilities}}$$
Debt-to-equity ratio
Proportion of company's total burden amount of money invested by its owners
Measure of outside money versus owners' money being used to run company operations
Companies using relatively more debt are called leveraged companies
Formula:
$$\dfrac{\text{Total liabilities}}{\text{Total shareholders' equity}}$$
Equity multiplier ratio
Proportion of company's total assets to amount of money invested by its owners
Measure of how much assets are funded by the owners of the business
Low ratio means company uses relatively more debt to fund its assets
Formula:
$$\dfrac{\text{Total assets}}{\text{Total shareholders' equity}}$$
Debt-to-assets ratio
- Proportion of a company's total liabilities to total assets
- Similar to current ratio
- Measure of whether the business has enough total assets to pay off its debts
Formula:
$$\dfrac{\text{Total liabilities}}{\text{Total assets}}$$
Family of ratios
Liquidity ratio
- Measures company's ability to meet short-term financial obligations, e.g.
- Current ratio
Leverage ratio
- Shows how company uses equity and debt to finance its activities, e.g.:
- Debt-to-equity ratio
- Equity multiplier ratio
Solvency ratio
- Measures company's financial health
- Demonstrates whether company can meet its financial obligations in general, e.g.:
- Debt-to-assets ratio
Let's practice!
Analyzing Financial Statements in Python
