/biz-financial-ratios

name: "\"biz-financial-ratios\""
description: "\"Analyze financial health using ratio categories: profitability, liquidity, leverage, efficiency, and valuation. Use this skill when the user needs to assess a company's financial performance, compare companies, evaluate creditworthiness, or prepare financial due diligence — even if they say 'is this company financially healthy', 'analyze these financial statements', or 'compare these two companies'.\"."
allowed-tools: Bash, Read, Write, Edit, Glob, Grep

Financial Ratio Analysis

Overview

Financial ratio analysis transforms raw financial statements into comparable metrics across five categories. Ratios are meaningful only in context — compare against industry benchmarks, historical trends, and peer companies.

When to Use

**Trigger conditions:**

• User has financial statements and needs to assess company health
• User comparing financial performance across companies
• User performing due diligence or credit analysis
• User asks "is this company financially healthy?" or "analyze these numbers"

**When NOT to use:**

• For valuation → use DCF or comparables
• For ROE deep-dive → use DuPont Analysis
• For strategic assessment → use SWOT

Framework

IRON LAW: Ratios Without Context Are Meaningless

A current ratio of 1.5 means nothing alone. Is 1.5 good? Compare to:
1. Industry average (retail ~1.2, manufacturing ~1.8)
2. Company's own trend (was it 2.0 last year? → declining liquidity)
3. Peers (competitor has 2.5? → relatively weak)

NEVER report a ratio without at least one comparison point.

IRON LAW: All Five Categories, Every Time

Analyzing only profitability misses a leveraged company about to default.
Analyzing only liquidity misses a profitable company's growth potential.
Cover all five categories for a complete picture.

The Five Categories

**1. Profitability** — Is the company making money? | Ratio | Formula | Measures | |-------|---------|----------| | Gross Margin | (Revenue - COGS) / Revenue | Production efficiency | | Operating Margin | EBIT / Revenue | Core business profitability | | Net Margin | Net Income / Revenue | Bottom-line profitability | | ROE | Net Income / Equity | Return to shareholders | | ROA | Net Income / Total Assets | Asset productivity |

**2. Liquidity** — Can it pay short-term obligations? | Ratio | Formula | Healthy | |-------|---------|---------| | Current Ratio | Current Assets / Current Liabilities | > 1.5 | | Quick Ratio | (Current Assets - Inventory) / Current Liabilities | > 1.0 | | Cash Ratio | Cash / Current Liabilities | Context-dependent |

**3. Leverage** — How much debt is used? | Ratio | Formula | Measures | |-------|---------|----------| | Debt-to-Equity | Total Liabilities / Equity | Capital structure | | Interest Coverage | EBIT / Interest Expense | Ability to service debt | | Debt-to-Assets | Total Liabilities / Total Assets | Asset financing |

> ⚠️ **"Debt" definition**: This skill (and the bundled script) defines "Debt" in the > leverage ratios as **Total Liabilities** — not "long-term debt only" or "interest-bearing > debt only". Both alternative definitions exist in textbooks and produce materially > different ratios. If you need a different definition, document the choice explicitly > and compute it manually; do not silently substitute.

**4. Efficiency** — How well are assets used? | Ratio | Formula | Measures | |-------|---------|----------| | Inventory Turnover | COGS / Avg Inventory | Inventory management | | Receivables Turnover | Revenue / Avg Receivables | Collection speed | | Asset Turnover | Revenue / Total Assets | Asset productivity | | Cash Conversion Cycle | DIO + DSO - DPO | Cash cycle speed |

**5. Valuation** — Is the stock fairly priced? | Ratio | Formula | Measures | |-------|---------|----------| | P/E | Price / EPS | Price vs earnings | | EV/EBITDA | Enterprise Value / EBITDA | Price vs cash generation | | P/B | Price / Book Value per Share | Price vs net assets | | Dividend Yield | Dividend per Share / Price | Income return |

Analysis Process

1. **Calculate** all relevant ratios from financial statements 2. **Compare** against industry benchmarks and 3-year trend 3. **Identify** red flags (declining trends, outliers vs peers) 4. **Synthesize** a financial health verdict across all five categories 5. **Recommend** actions based on weak areas

Output Format

> ⚠️ **Decimal vs percent**: The bundled script returns all profitability ratios > (`gross_margin`, `operating_margin`, `net_margin`, `roa`, `roe`) as **decimals** — > `0.35` means 35%, NOT `35.0`. Liquidity and leverage ratios are already unitless > multiples (e.g. `current_ratio: 2.125`). Render percentages only in the human-facing > markdown report, never in JSON outputs.

# Financial Ratio Analysis: {Company}

## Summary Dashboard
| Category | Status | Key Metric |
|----------|--------|-----------|
| Profitability | 🟢/🟡/🔴 | {headline ratio} |
| Liquidity | 🟢/🟡/🔴 | {headline ratio} |
| Leverage | 🟢/🟡/🔴 | {headline ratio} |
| Efficiency | 🟢/🟡/🔴 | {headline ratio} |
| Valuation | 🟢/🟡/🔴 | {headline ratio} |

## Detailed Ratios
{Tables per category with ratio, value, industry avg, trend}

## Red Flags
- {specific concern with data}

## Overall Assessment
{Synthesized financial health verdict}

Examples

Correct Application

**Scenario:** Ratio analysis for a Taiwanese electronics manufacturer

| Ratio | Company | Industry | Trend | Flag | |-------|---------|----------|-------|------| | Gross Margin | 18% | 22% | ↓ from 21% | 🔴 Below peers, declining | | Current Ratio | 1.8 | 1.5 | → stable | 🟢 Adequate | | D/E | 1.2 | 0.8 | ↑ from 0.9 | 🟡 Rising leverage | | Inventory Turnover | 4.2x | 6.0x | ↓ from 5.1x | 🔴 Slow inventory |

Synthesis: Profitability weakening + inventory building up + leverage rising = potential working capital crisis ahead ✓

Incorrect Application

• Reported "Gross Margin 18%" as standalone fact → N