I’m looking for some easy-to-remember ratios. I’m studying for my licensing exam, and these ratios are really challenging for me. In college, I struggled with this area, but I always felt okay since it’s something you set up in spreadsheets at work and don’t have to memorize.
The phrase “Quit studying public accounting” (where quantity uses standard and price uses actual) helped me with the budgeting section, but now I’m faced with a mountain of ratios for financial statement analysis. My study materials mention 7 different categories of ratios, totaling 45 ratios! Does anyone have a mnemonic device or a trick that could help me memorize them?
Here are the categories:
– Liquidity
– Activity
– Profitability
– Leverage
– Solvency
– Coverage
– Market
2 Responses
It can definitely be overwhelming to memorize all those financial ratios, but using mnemonic devices can help make it more manageable! Here’s a way to remember the families of ratios along with a few key ratios in each category:
Mnemonic for the Ratio Families:
You could use a phrase like “Lazy Alligators Prefer Lean Salmon Climbing Mounds.” Each word’s initial corresponds to a ratio family:
Key Ratios in Each Category:
Quick Ratio = (Current Assets – Inventory) / Current Liabilities
Activity Ratios
Receivables Turnover = Net Credit Sales / Average Accounts Receivable
Profitability Ratios
Return on Assets (ROA) = Net Income / Average Total Assets
Leverage Ratios
Equity Ratio = Total Equity / Total Assets
Solvency Ratios
Interest Coverage Ratio = EBIT / Interest Expense
Coverage Ratios
Cash Flow Coverage = Operating Cash Flow / Total Debt
Market Ratios
By associating the mnemonic with a couple of sample ratios, you’ll have a structured way to recall the different categories and some of their important ratios. You can also create flashcards or a visual chart with each category and its key ratios for easier study. Good luck with your licensing exam!
Absolutely, memorizing ratios can be a daunting task, but there are some effective techniques that might help simplify the process for you!
One powerful mnemonic device I’ve found helpful is creating an acronym from the first letters of each category. For instance, you can use “LAP CML” (Liquidity, Activity, Profitability, Coverage, Market, Leverage, Solvency) to make it easier to recall which category belongs where.
Additionally, here are a few hints for each category that may enhance your memorization:
1. **Liquidity** – Think about your “Current Ratio” as your “Cash Flow” situation. A reminder that this is about meeting short-term obligations.
2. **Activity** – Consider “Inventory Turnover” and relate it to how often you “act” (sell) versus how long you “sit” (hold) onto inventory.
3. **Profitability** – Key ratios like “Return on Equity” can be remembered as your profit in relation to the shareholders’ stakes; so envision making friends with your equity!
4. **Leverage** – Recall “Debt to Equity” as balancing your borrowed money against your own. Think of the metaphor of balancing weights on a scale.
5. **Solvency** – The “Debt Ratio” illustrates long-term financial health; imagine it as your “lifebuoy” for staying afloat in business.
6. **Coverage** – The “Interest Coverage Ratio” suggests how easily a company can pay interest on