AI for Financial Analysis · Lesson 2

Building a Ratio Analysis Framework

Build a complete ratio analysis system: liquidity, profitability, efficiency, leverage. Prompts for industry benchmarking and interpreting results.

40 min read4 questions in quizReady prompt includedIn progress

Practical exercise

What to do after this lesson

Find two competitors in the same industry (e.g., Nike and Adidas, or JPMorgan and Bank of America). Collect their key financial data for the past year. Use the prompt from this lesson for a comparative analysis across all four ratio groups. Conclude: which company is financially healthier and why.

Task grader

Find two competitors in the same industry (e.g., Nike and Adidas, or JPMorgan and Bank of America). Collect their key financial data for the past year. Use the prompt from this lesson for a comparative analysis across all four ratio groups. Conclude: which company is financially healthier and why.

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Ready-to-use prompt

Template for this lesson

Copy and adapt to your context. Text in angle brackets should be replaced.

You are an expert financial analyst. Perform a complete ratio analysis for the company below.

DATA:
[PASTE FINANCIAL DATA — P&L + Balance Sheet]

TASK:
1. Calculate all ratios across four groups:
   - Liquidity: Current Ratio, Quick Ratio, Cash Ratio
   - Profitability: Gross Margin, EBITDA Margin, Net Margin, ROE, ROA
   - Efficiency: Asset Turnover, DSO, DPO, Inventory Turnover
   - Leverage: D/E, Debt/EBITDA, Interest Coverage

2. For each ratio: value, industry benchmark for [INDUSTRY], rating (✅ GOOD / ⚠️ WATCH / 🔴 FLAG)

3. Top 3 strengths and top 3 risk areas.

4. Overall financial health score: 1–10 with reasoning.

Output as a Markdown table. Note: for informational purposes only, not investment advice.

Four Groups of Ratios

Professional financial analysis is structured around four blocks.

1. Liquidity

The company's ability to pay short-term obligations.

Current Ratio = Current Assets / Current Liabilities → benchmark > 1.5 Quick Ratio = (Current Assets - Inventory) / Current Liabilities → benchmark > 1.0 Cash Ratio = Cash / Current Liabilities → benchmark > 0.2

2. Profitability

Efficiency of profit generation.

Gross Margin = Gross Profit / Revenue × 100% EBITDA Margin = EBITDA / Revenue × 100% Net Margin = Net Income / Revenue × 100% ROE = Net Income / Shareholders' Equity × 100% ROA = Net Income / Total Assets × 100% ROIC = NOPAT / Invested Capital × 100%

3. Efficiency

Speed of asset turnover.

Asset Turnover = Revenue / Total Assets Inventory Turnover = COGS / Average Inventory DSO = Accounts Receivable / (Revenue / 365) [days sales outstanding] DPO = Accounts Payable / (COGS / 365) [days payable outstanding]

4. Leverage

Financial risk and capital structure.

D/E Ratio = Total Debt / Equity Debt/EBITDA = Total Debt / EBITDA → benchmark < 3x Interest Coverage = EBIT / Interest Expense → benchmark > 3x

Industry Benchmarks

The same values can be normal in one industry and a red flag in another:

| Metric | Retail | SaaS | Manufacturing | Banks | |---|---|---|---|---| | Gross Margin | 25–40% | 70–85% | 20–35% | N/A | | Net Margin | 2–5% | 10–25% | 5–12% | 15–25% | | D/E | 1–3x | 0–0.5x | 0.5–1.5x | 8–12x |

Prompt for a Full Ratio Breakdown

You are an expert financial analyst. Conduct a complete ratio analysis of the company. DATA: [PASTE FINANCIAL DATA] TASK: 1. Calculate all ratios across four groups (liquidity, profitability, efficiency, leverage). 2. For each ratio: value, industry benchmark for [INDUSTRY], rating (✅/⚠️/🔴). 3. Identify top 3 strengths and top 3 risk areas. 4. Give an overall financial health score: 1–10 with reasoning. Output as a Markdown table.

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Building a Ratio Analysis Framework

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Quiz — 4 questions

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