Financial statement ratios: liquidity, efficiency, and DuPont ROE

The rules, one page each

1. Current Ratio After Paying Accounts Payable: The 1.0 RuleContrasting cases

   Cash payment of accounts payable reduces current assets and current liabilities equally. The current ratio rises if initially above 1.0, falls if below 1.0, and stays unchanged at 1.0; working capital stays unchanged.

2. How to Calculate the Quick Ratio (Acid-Test Ratio)Worked example

   Quick ratio = (unrestricted cash and cash equivalents + short-term marketable securities + net trade receivables) ÷ all current liabilities. Exclude inventory, prepaids, and cash restricted for long-term use; include current maturities of long-term debt.

3. DuPont ROE: Find the Margin, Turnover, or Leverage DriverWorked example

   ROE = net profit margin × asset turnover × equity multiplier. Compare each component's percentage change across periods, then hold the other components constant to isolate its effect.

4. Financial Ratio Analysis: Liquidity, Leverage, and ROEWhat next?

   Read liquidity, turnover, and leverage together. A rising current ratio with falling quick ratio and inventory turnover signals inventory buildup; rising ROE with falling margin and asset turnover points to leverage, not stronger operations.

5. Receivables Turnover, DSO, Inventory Turnover, and DSIWorked example

   Receivables turnover = net credit sales ÷ average net trade receivables; DSO = 365 ÷ receivables turnover. Inventory turnover = COGS ÷ average inventory; DSI = 365 ÷ inventory turnover.