Financial statement analysis: ratios and the DuPont model

In this lesson you will learn

Calculate and interpret liquidity, profitability, turnover and solvency ratios
Break ROE into three drivers with the DuPont model
Calculate the cash conversion cycle and link it to management decisions
Take the data for analysis from 1C

A bank is deciding whether to lend to Xazar Ticaret LLC. The credit analyst doesn't read hundreds of figures in the statements but their ratios: can the company pay its short-term debts, how much does it earn on each manat of sales, how many days do goods sit in the warehouse? Financial ratios make it possible to compare companies of different sizes and different years.

Balance sheet, ₼	31.12.2024	31.12.2025
Cash (221, 223)	12 000	18 000
Trade receivables (211)	26 000	30 000
Inventories (205)	38 000	42 000
Current assets	76 000	90 000
PP&E, net (111 − 112)	104 000	110 000
Total assets	180 000	200 000
Trade payables (531)	40 000	45 000
Other current liabilities	15 000	15 000
Current liabilities	55 000	60 000
Long-term bank loans (401)	45 000	40 000
Equity	80 000	100 000
Total liabilities and equity	180 000	200 000

Income statement, 2025, ₼	Amount
Revenue, net of VAT (601)	400 000
Cost of sales (701)	280 000
Gross profit	120 000
Selling (711) and administrative (721) expenses	35 000 + 45 000
Operating profit (EBIT)	40 000
Interest expense	5000
Profit before tax	35 000
Profit tax (20%)	7000
Net profit	28 000

A training example. Equity went from 80 000 to 80 000 + 28 000 − 8000 (dividends) = 100 000 ₼.

Horizontal and vertical analysis

Growth = (X₁ − X₀) / X₀ × 100%; Share = X / Base × 100%Growth = (X₁ − X₀) / X₀ × 100%; Share = X / Base × 100%

where:

X₀, X₁the item's value in the previous and current period
Basein vertical analysis: total assets for the balance sheet, revenue for the income statement

Horizontal analysis shows how each item changes over time: assets grew by (200 000 − 180 000) / 180 000 ≈ 11.1%, equity by 25%. Vertical analysis shows structure: cost of sales is 280 / 400 = 70% of revenue, inventories are 42 / 200 = 21% of assets. Both answer “where did something change?”, while ratios answer “is it good or bad?”.

Liquidity and solvency

Current = CA / CL; Quick = (CA − Inv) / CL; Cash = C / CLCurrent = CA / CL; Quick = (CA − Inv) / CL; Cash = C / CL

where:

CA, CLcurrent assets and current liabilities
Invinventories — the current asset slowest to turn into cash
Ccash and cash equivalents

Solvency: Debt-to-equity = Total liabilities / Equity; interest coverage = EBIT / Interest expense.

Example 1: liquidity and leverage

Calculate Xazar Ticaret's current, quick and cash ratios at 31.12.2025, its debt-to-equity ratio and interest coverage. The bank's loan covenant requires a current ratio of at least 1.2.

Show solution

Current: 90 000 / 60 000 = 1.5 — the covenant (≥ 1.2) is met.
Quick: (90 000 − 42 000) / 60 000 = 0.8 — without inventories there is 0.80 ₼ for each 1 ₼ of short-term debt.
Cash: 18 000 / 60 000 = 0.3.
Debt-to-equity: (60 000 + 40 000) / 100 000 = 1.0; liabilities finance 50% of assets.
Interest coverage: 40 000 / 5000 = 8 times.
Conclusion: liquidity is acceptable, but part of the debt depends on selling the goods.

Profitability and the DuPont model

ROA = NI / Avg TA; ROE = NI / Avg EROA = NI / Avg TA; ROE = NI / Avg E

where:

NInet profit for the year
Avg TA, Avg Eaverage of opening and closing total assets and equity: (opening + closing) / 2

Margins: gross = gross profit / revenue, operating = EBIT / revenue, net = net profit / revenue.

The DuPont model comes from multiplying and dividing the fraction by the same numbers: ROE = NI / E = (NI / S) · (S / TA) · (TA / E). The first factor is the net margin (profit per manat of sales), the second the asset turnover (sales per manat of assets), the third the financial leverage (equity multiplier, the role of debt). So the same ROE can come from a high margin, fast turnover or heavy borrowing — with very different risk.

ROE = (NI / S) × (S / Avg TA) × (Avg TA / Avg E)ROE = (NI / S) × (S / Avg TA) × (Avg TA / Avg E)

where:

Srevenue net of VAT

Example 2: margins, ROA, ROE and DuPont

For 2025 calculate the gross, operating and net margins, ROA and ROE (using averages), and split ROE into its DuPont factors.

Show solution

Margins: 120 000 / 400 000 = 30%; 40 000 / 400 000 = 10%; 28 000 / 400 000 = 7%.
Average assets (180 000 + 200 000) / 2 = 190 000; average equity (80 000 + 100 000) / 2 = 90 000.
ROA = 28 000 / 190 000 ≈ 14.7%; ROE = 28 000 / 90 000 ≈ 31.1%.
DuPont: 0.07 × (400 000 / 190 000 ≈ 2.105) × (190 000 / 90 000 ≈ 2.111) ≈ 0.311 = 31.1% ✓.
Interpretation: the high ROE comes mainly from fast turnover and leverage; the margin itself is moderate.

Turnover and the cash conversion cycle

DIO = 365 × Avg Inv / COGS; DSO = 365 × Avg AR / S; DPO = 365 × Avg AP / Purchases; CCC = DIO + DSO − DPODIO = 365 × Avg Inv / COGS; DSO = 365 × Avg AR / S; DPO = 365 × Avg AP / Purchases; CCC = DIO + DSO − DPO

where:

COGScost of goods sold
Avg AR, Avg APaverage trade receivables and trade payables
Purchasesgoods bought in the year = COGS + closing inventory − opening inventory
CCCcash conversion cycle: days from paying cash for goods to getting cash back

Turnover ratio = 365 / days; for example inventory turnover = COGS / Avg Inv.

Example 3: how many days is cash tied up?

For 2025 calculate DIO, DSO, DPO and the cash conversion cycle (year = 365 days). How would the cycle change if suppliers shortened payment terms by 10 days?

Show solution

Average inventory (38 000 + 42 000) / 2 = 40 000 → turnover 280 000 / 40 000 = 7 → DIO = 365 / 7 ≈ 52.1 days.
Average receivables 28 000 → DSO = 365 × 28 000 / 400 000 ≈ 25.6 days.
Purchases = 280 000 + 42 000 − 38 000 = 284 000; average payables 42 500 → DPO = 365 × 42 500 / 284 000 ≈ 54.6 days.
Cycle = 52.1 + 25.6 − 54.6 ≈ 23.1 days.
If DPO falls by 10 days, the cycle grows to ≈ 33.1 days — the company needs more working capital (or credit).

Getting the data out of 1C

For balances the Оборотно-сальдовая ведомость (start and end of year) is enough, and for revenue and expenses Анализ счета or the year's turnovers; it is convenient to save the report to Excel and calculate the ratios there. Developers get the same figures with a query: in configurations based on Бухгалтерия предприятия the accounting register is called Хозрасчетный.

1C Query

ВЫБРАТЬ
    Остатки.Счет.Код КАК Счет,
    Остатки.СуммаОстатокДт КАК ОстатокДт,
    Остатки.СуммаОстатокКт КАК ОстатокКт
ИЗ
    РегистрБухгалтерии.Хозрасчетный.Остатки(&НаДату, , , Организация = &Организация) КАК Остатки
УПОРЯДОЧИТЬ ПО
    Счет

Balances by account. Pass the start of the next day as &НаДату (e.g. 01.01.2026) to get balances at the end of 31.12.2025.

Key points

Horizontal analysis shows change, vertical analysis shows structure, and ratios show the quality of the position.
Liquidity: current = CA/CL, quick = (CA − Inv)/CL, cash = C/CL.
DuPont: ROE = net margin × asset turnover × equity multiplier.
Cash conversion cycle = DIO + DSO − DPO; a shorter cycle needs less working capital.
Use average balances in flow/stock ratios, take revenue net of VAT and compare industries with care.

Check yourself

10 questions. Every correct answer earns XP.

1 / 10

CA = 90 000 ₼, inventories = 42 000 ₼, CL = 60 000 ₼. What is the quick ratio?