Ratio Analysis
Financial Analysis
Finance
Lesson Plan
Performance Objective
Students will understand the importance of financial ratios in assessing a company’s financial condition.
Specific Objectives
 Discuss the use of different types of ratios in business
 Calculate financial ratios
 Graph financial ratios
Terms
 Ratio‐ a comparison of two amounts
 Ratio analysis‐ calculating and interpreting financial ratios; a tool businesses use to identify possible
problems as well as opportunities of a business
 Liquidity‐ measures how quickly assets can be converted to cash
 Efficiency‐ measures how well assets and liabilities are managed
 Leverage‐ how much debt is used to finance an asset
 Profitability‐ sales minus the costs associated with the goods or services sold
 Stock‐ share of ownership in a company
Time
When taught as written, this lesson should take approximately four to five days to teach.
Preparation
TEKS Correlations
This lesson, as published, correlates to the following TEKS. Any changes/alterations to the activities may result
in the elimination of any or all of the TEKS listed.
130.168 (c) Knowledge and Skills
(3) The student demonstrates mathematics knowledge and skills required to pursue the full range of
postsecondary education and career opportunities. The student is expected to:
(A) demonstrate knowledge of arithmetic operation such as addition, subtraction,
multiplication, and division;
(B) demonstrate use of relational expressions such as equal to, not equal to, greater than, less
than;
(C) apply data and measurements to solve a problem; and
(F) analyze data when interpreting operational documents.
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1
Interdisciplinary Correlations
English‐English I
 110.31(b)(1) Reading/Vocabulary Development. Students understand new vocabulary and use it when
reading and writing.
 110.3 (b)(11) Reading/Comprehension of informational text/procedural texts. Students understand
how to glean and use information in procedural texts and documents.
Math‐Algebra I
 111.32 (b)(1)(C) Interpret and make decisions, predictions, and critical judgments from functional
relationships.
Social Studies‐World Geography
113.34 (c)(20)(A) Describe the impact of new technologies, new markets, and revised perceptions of
resources.
Occupational Correlation (O*Net – www.onetonline.org/):
Job Title: Accountants
O*Net Number: 13‐2011.01
Reported Job Titles: Business Analyst, Accounting Supervisor, Financial Reporting Accountant
Tasks
 Prepare, examine, or analyze accounting records, financial statements, or other financial reports to
assess accuracy, completeness, and conformance to reporting and procedural standards.
 Analyze business operations, trends, costs, revenues, financial commitments, and obligations, to
project future revenues and expenses or to provide advice.
 Report to management regarding the finances of establishment.
Soft Skills: Mathematics, Complex Problem Solving, Critical Thinking
Accommodations for Learning Differences
It is important that lessons accommodate the needs of every learner. These lessons may be modified to
accommodate your students with learning differences by referring to the files found on the Special
Populations page of this website.
Preparation
 Review and familiarize yourself with the terminology and website links.
 Have materials and websites ready prior to the start of the lesson.
References
 http://ro.uow.edu.au/commpapers‐ An Example of the Use of Financial Ratio Analysis: The Case of
Motorola
 Century 21 Accounting Advanced, South‐Western Publishing, 2008.
Copyright © Texas Education Agency, 2014. All rights reserved.
2




South‐Western Contemporary Mathematics: for Business and Consumers
https://secure.wvscpa.org/resources/public/56‐takin_care_of_business_cpa_ipack
http://www.sec.gov
https://takechargetoday.arizona.edu/lessonplans/financial‐facts‐feud
Instructional Aids
 Textbook or Computer Program Diagrams/Charts
 Lesson 1.01 Presentation
 Instructor Computer/Projection Unit
 Online Websites
Introduction
The main purposes of this lesson are to help students understand the following concepts:
 how to calculate financial ratios,
 what financial ratios mean to a business, and
 how some ratios relate to each other.
Ask students, “if a company is making sales, is it also making a profit?”
Ask students if they think that comparing a company’s ratios to a similar company is more or less
accurate than comparing them to the industry itself.
Copyright © Texas Education Agency, 2014. All rights reserved.
3
Outline
I.
What is Ratio Analysis?
A. Ratio‐ a comparison of two
numbers
B. Ratio analysis‐ a tool
businesses use to identify
possible problems as well as
opportunities
Ask students if they know what a
ratio is. Provide examples, such
as males to females in a
particular college, odds of
winning the lottery, or a
comparison of a salary for two
different occupations.
II.
Types of Financial Ratios
A. Liquidity‐ how well a company
can pay off short‐term loan
obligations and meet cash
needs
B. Efficiency‐ how effectively a
company utilizes its resources
to generate revenue
C. Leverage‐ shows how a
company’s assets are financed
D. Profitability‐ Measures the
ability of a business’s
resources to generate income
that results in a profit
E. Stock‐ also called value or
investor ratios, examines
different aspects of a
company’s stock
Explain that ratios are a way to
quantify the financial condition
of a business. We may see their
products in stores, but how are
they really doing?
III.
When introducing the concept of
liquidity, ask students if they
needed money to buy prom
tickets; for example, how much
cash on hand would they have
(just fictitious amounts), or is it
in a savings account? Is there
anything they can sell to get
cash?
What is liquidity and why is it
important?
A. Liquidity‐ measures how
quickly assets can be
converted to cash
Multiple Intelligences Guide
Existentialist
Interpersonal
Intrapersonal
Kinesthetic/
Bodily
Logical/
Mathematical
Musical/Rhythmic
Naturalist
Verbal/Linguistic
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4
Visual/Spatial
B. Can determine how easily a
company can meet its debt
obligations
IV.
Liquidity Ratios
A. Working Capital
1. Shows what is left after all
liabilities are paid by the
assets
2. Equals Current Assets –
Current Liabilities
B. Current Ratio
1. Shows the dollar value of
assets for each dollar of
liabilities
2. Equals Total Current
Assets/Total
Current Liabilities
C. Quick Ratio
1. Determines the ability to
meet short‐term debt
obligations
2. Equals (Total Current
Assets – Inventories)/Total
Current Liabilities
V.
What is Efficiency and why is it
important?
A. Efficiency‐ how well assets
and liabilities are managed
B. Focus is on management
VI.
Efficiency Ratios
A. Average collection period
1. How efficiently a company’s
accounts receivables (or
credit accounts) are
Place sticky flip chart paper on
the walls around the room and
assign a ratio to groups of two or
three, depending on your class
size. Have the groups conduct
research on whether a higher or
lower ratio is better. Once they
find out, they can write the ratio
name, what it means, the
formula, and the words,
“Higher” or “Lower.” Each group
can take turns presenting their
ratio to the class. No calculations
are necessary yet.
Show students a Balance Sheet
for a company they select. Then,
on the document camera or
board, show the students an
example of which accounts are
used for a ratio that you select.
Calculate the ratio and explain if
the ratio is favorable or
otherwise.
Then show them an Income
Statement and have the
students call out a ratio. Have a
student come up to the board
and demonstrate how to
calculate the ratio.
Multiple Intelligences Guide
Kinesthetic/
Logical/
Copyright © Texas Education Agency, 2014. All rights reserved.
5
Existentialist
Interpersonal
Intrapersonal
Bodily
Mathematical
Musical/Rhythmic
handled
2. Equals Average Accounts
Receivable/(Total
Sales/365)
B. Inventory ratios‐ tells how
often inventory is sold; too high
a ratio can lead to high storage
costs
1. Inventory turnover = cost of
goods sold/average
inventory
2. Average days to sell
inventory = days in a
year/inventory turnover
C. Total asset turnover
1. How much a dollar of
assets generates in sales
2. Equals Sales/Average Total
Assets
D. Accounts Receivable Turnover
1. The average number of
times accounts receivable is
collected in a time period
2. Equals sales on
Account/Average
Receivables
VII.
What is Leverage and why is it
important?
A. Leverage‐ how much debt is
used to finance an asset
B. Can cause a company to run
the risk of bankruptcy if there is
too much debt that cannot be
repaid
Naturalist
Verbal/Linguistic
Visual/Spatial
As you are going through the
ratios, you can highlight the
accounts that are used for each
ratio. You can also locate
financial statements for a
popular, well‐known company
and, if you have a computer lab,
have students view the same
company’s financial statements,
or print them for the students to
highlight the accounts.
Show students how to locate
financial statements from
several sources. They can go
directly to a company website
and usually there will be a tab or
a page saying “Investor
Relations.” Students can also go
to www.sec.gov, go to Filings,
Company Filings Search, Full Text
(on the left), Advanced Search
Page (on the right), Under
Forms, click on 10‐K, and click on
Company Name, then type in the
name of the company. Click the
link at the bottom for the 10‐K.
Look in the Table of Contents for
Financial Statements.
Multiple Intelligences Guide
Existentialist
Interpersonal
Intrapersonal
Kinesthetic/
Bodily
Logical/
Mathematical
Musical/Rhythmic
Naturalist
Verbal/Linguistic
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Visual/Spatial
VIII. Leverage Ratios
A. Debt to assets
1. Measures the degree of
financing of assets
2. Equals Total Debt/Total Assets
B. Debt to equity
1. Measures the amount of debt
financed by every dollar of
equity; the higher the ratio
the higher the risk to possible
investors or creditors
2. Equals Total Debt/Total Equity
IX.
What is probability and why is it
important?
A. Profitability formula‐ sales minus
the costs associated with the
goods or services sold
B. Importance is that making a profit
is the most prominent goal of
most businesses.
X.
Profitability Ratios
A. Net profit margin
1. Measures how well the cost of
goods sold is controlled as
well as the operating accounts
2. Equals profit after
taxes/Sales
B. Return on investment
1. Represents the amount of
profit as it relates to the
owner’s investment
Continue going through the
ratios with students—having
them respond to questions to
check for their understanding.
They can take turns in pairs
coming up to a projector and
pointing out how to make the
calculations.
Multiple Intelligences Guide
Copyright © Texas Education Agency, 2014. All rights reserved.
7
Existentialist
Interpersonal
Intrapersonal
Kinesthetic/
Bodily
Logical/
Mathematical
Musical/Rhythmic
2. Equals Net Income/Owner’s
Equity
C. Return on equity
1. Measures % of profit earned
on the stockholder’s
investment
2. Equals profit after taxes
/Stockholder’s Equity
D. Return on assets
1. Measures the profit earned
from the assets of the
company
2. Equals profit after taxes /
Total Assets
XI.
What are investor ratios and why are
they important?
A. Also referred to as ratios that
affect stock
B. Stockholders concerned about
how well a company is performing
C. Dividends paid from profits so
stockholders are concerned with
earnings
Naturalist
Verbal/Linguistic
Visual/Spatial
You can also create a Family
Feud (called Financial Facts
Feud) game for the students and
divide the class into teams. An
example question could be:
What terms are associated with
the Quick Ratio? The choices
can include: Total Current
Assets, Inventories, or Current
Liabilities. If any guesses are
made that are incorrect, the
team gets a strike. Three strikes
and the other team gets a
chance to answer. Follow this
link to get a template:
https://takechargetoday.arizona.
edu/lessonplans/financial‐facts‐
feud. You need to register for
the website but it is free.
XII. Investor Ratios
A. Earnings per share
1. The amount of net income
that belongs to one share of
stock
2. Equals net Income /
Outstanding
Shares
B. Price‐earnings ratio
1. Measures the amount
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Multiple Intelligences Guide
Existentialist
Interpersonal
Intrapersonal
Kinesthetic/
Bodily
Logical/
Mathematical
Musical/Rhythmic
investors are willing to pay for
every dollar of profit
2. Equals current Market Price
per Share / After‐tax Earnings
per Share
C. Dividend Yield
1. Measures the return paid as
dividends to stockholders
2. Equals Annual Dividends per
Share / Current Market Price
per Share
Naturalist
Verbal/Linguistic
Visual/Spatial
Show students how to graph the
ratios to provide a visual
representing of the ratios. It is
important to tell them to
convert the ratios to decimals.
They can see how different
ratios and years can be
compared. Graphs can make
trends easier to see visually than
numbers do.
XIII. Graphing Ratios‐ graphing provides a
visual method of representing the
ratio making trends more apparent.
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Multiple Intelligences Guide
Existentialist
Interpersonal
investors are willing to pay
Show students how to graph
for every dollar of profit
the ratios to provide a visual
2. Equals
current Market Price
representing of the ratios. It is
Kinesthetic/
Logical/
per
Share
/
After-tax
tell them to Visual/Spatial
Intrapersonal
Bodily
Mathematical Musical/Rhythmicimportant
Naturalist to Verbal/Linguistic
Earnings per Share
convert the ratios to decimals.
C. Dividend Yield
They can see how different
1. Measures the return paid as
ratios and years can be
Application
dividends
to stockholders
compared. Graphs can make
2. Equals Annual Dividends
trends easier to see visually
per Share / Current Market
than numbers do.
Price per Share
XIII. Graphing Ratios- graphing
provides a visual method of
representing the ratio making
trends more apparent.
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10
Guided Practice
The teacher can divide students into groups of two or three and have them draw the name of a company out
of a hat, or box, etc. They can also draw five ratios. They are to calculate the ratios for the company they drew
and create a presentation to show to students.
Independent Practice
 Students can create index cards for vocabulary.
 Teacher can distribute a printout of a balance sheet or an income statement and a sheet with ratios
and answer blanks, so they can practice calculating the ratios.
Summary
Review
Ask students the following questions on exit tickets or using a matching activity.
Question #1:
Answer #1:
Why is ratio analysis important to a company?
Businesses can use the results of ratio analysis to identify possible problems as well as
opportunities.
Question #2:
Answer #2:
Which type of ratio is concerned with the financing of assets?
Leverage ratios reveal how assets are financed.
Question #3:
Answer #3:
Which financial statement is most important to calculate liquidity ratios?
The Balance Sheet contains the assets and liabilities included in analyzing liquidity.
Question #4:
Answer #4:
What asset accounts are most important to the efficiency ratios?
Inventory and Accounts Receivables are important in efficiency ratios.
Question #5:
Answer #5:
What is most important in calculating investor ratios?
Aspects of stocks such as price, dividends, and number of shares are important in
calculating investor ratios.
Evaluation
Informal Assessment
Any and all of the following can be used as informal assessments:
 Exit tickets with vocabulary
 Pair‐share activities
 Class discussion and participation
Formal Assessment
The following can be considered a formal evaluation:
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11

Company Comparison Chart Assignment #1 – Students will select two companies for comparison.
They will prepare a chart or table (using either a spreadsheet program or a word processing program).
They will list the five categories of ratios with two ratios each on the left side and the top row listing
the two chosen companies with three years of ratios calculated for each. One observation about the
change over the years for each company as well as one conclusion or prediction must be included for
each ratio. Following is a sample setup for this chart:
2012
Liquidity
Current Ratio
Quick Ratio
1.30
.30
Company A
2011
1.21
.28
2010
1.12
.21
2012
1.20
.23
Company B
2011
1.26
.16
2010
1.34
.11

Ratio Gameboard Assignment #2 – In pairs, students will create a gameboard of at least 20 spaces
summarizing their understanding of ratios. There may only be five free or blank spaces. The remaining
15 should include facts and/or figures related to ratio analysis. For example, a space could have a
definition, significance, or formula for current assets. If it is correct, the student could roll a die and
move forward that many spaces. If the space has false information, the student has to give the correct
answer or roll the die and move backward that many spaces. Students can create any type of
gameboard they want as long as it is creative, entertaining, and contains at least 15 facts about ratios.

Motorola Analysis Assignment #3 – Using the website (referenced above) called, “The Case of
Motorola,” the students will each read the Financial Ratio Analysis section of the document to look for
explanations of at least five different ratios. The students will discuss the implications of what the
results, whether they are higher than their industry or lower than their industry, actually mean. For
example, the Fixed Asset Turnover ratio is higher than the Semiconductor Industry ratio, meaning that
Motorola is using its assets to generate sales more resourcefully than the industry. They should
include at least five ratios in their discussion of the implications of what they mean. Students will
create a one‐ to two‐page report to detail their findings.
Enrichment
Extension
Have students interview an employee, manager, or owner of a business who has access to the company’s
financial statements. Select three ratios of your choosing and ask the business person if you can calculate
those three ratios using numbers from their statements. Summarize your findings in a short report and make a
conclusion about the ratios you have calculated.
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Financial Analysis
Ratio Analysis
Company Comparison Chart Assignment #1
Student Name: ________________________________________
CATEGORY
20
15
8
1
Required
Elements
The chart
includes all
required
elements as well
as additional
information.
All required
elements are
included on the
chart.
All but one of
the required
elements are
included on the
chart.
Several required
elements were
missing.
Knowledge
Gained
Student can
accurately
answer all
questions related
to facts in the
chart and
processes used
to create the
chart.
Student can
accurately
answer most
questions
related to facts
in the chart and
processes used
to create the
chart.
Student can
accurately
answer about
75% of questions
related to facts
in the chart and
processes used
to create the
chart.
Student appears
to have
insufficient
knowledge about
the facts or
processes used
in the chart.
Attractiveness
The chart is
exceptionally
attractive in
terms of design,
layout, and
neatness.
3+original
graphics.
The chart is
attractive in
terms of design,
layout, and
neatness. 1‐2
original graphics.
The chart is
acceptably
attractive,
though it may be
a bit messy.
The chart is
distractingly
messy or very
poorly designed.
It is not
attractive.
Grammar
There are no
There is one
There are two
There are more
spelling mistakes spelling mistake spelling mistakes than two speling
on the chart.
on the chart.
on the chart.
mistakes on the
chart.
Labels
All category and
ratio names are
correctly
included on the
chart.
Maximum Points Possible: 100
Chart contains
one to two
errors on the
category or ratio
names.
Chart contains
three to four
errors on the
category or ratio
names.
There are more
than four errors
on the category
or ratio names
on the chart.
Student Points:
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13
Financial Analysis
Ratio Analysis
Ratio Gameboard Assignment #2
Student Name: ________________________________________
CATEGORY
20
15
8
1
Knowledge
Gained
The student could easily
and correctly state
several facts about the
topic used for the game
without looking at the
game.
The student could
easily and correctly
state one to two facts
about the topic used
for the game without
looking at the game.
The student could
easily and correctly
state one to two
facts about the topic
used for the game
without looking at
the game.
The student could
NOT correctly
state facts about
the topic used for
the game without
looking at the
game.
Accuracy of
Content
All information cards
All but one of the
made for the game are information cards
correct.
made for the game are
correct.
All but two of the
information cards
made for the game
are correct.
Several
information cards
made for the
game are not
accurate.
Attractiveness Contrasting colors and
at least three original
graphics were used to
give the cards and
gameboard visual
appeal.
Contrasting colors and
at least one original
graphic were used to
give the cards and
gameboard visual
appeal.
Contrasting colors
and "borrowed"
graphics were used
to give the cards and
gameboard visual
appeal.
Little or no color
or fewer than
three graphics
were included.
Creativity
The student put a lot of
thought into making the
game interesting and
fun to play as shown by
creative questions,
game pieces, and/or
game board.
The student put some
thought into making
the game interesting
and fun to play by
using textures, fancy
writing, and/or
interesting characters.
The student tried to
make the game
interesting and fun,
but some of the
things made it
harder to
understand/enjoy
the game.
Little thought was
put into making
the game
interesting or fun.
Rules
Rules were written
Rules were written, but
clearly enough that all one part of the game
could easily participate. needed slightly more
explanation.
Maximum Points Possible: 100
Rules were written, The rules were not
but people had some written.
difficulty figuring out
the game.
Student Points:
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14
Financial Analysis
Ratio Analysis
Motorola Analysis Assignment #3
Student Name: ________________________________________
CATEGORY
20
15
8
1
Evidence and
Examples
All of the
evidence and
examples are
specific and
relevant.
Most of the
evidence and
examples are
specific and
relevant.
At least one of
the pieces of
evidence and
examples is
relevant.
Evidence and
examples are
NOT relevant
AND/OR are not
explained.
Accuracy
All supportive
facts and
statistics are
reported
accurately.
Almost all
supportive facts
and statistics are
reported
accurately.
Most supportive
facts and
statistics are
reported
accurately.
Most supportive
facts and
statistics were
inaccurately
reported.
Transitions
A variety of
thoughtful
transitions are
used. They
clearly show
how ideas are
connected.
Transitions show
how ideas are
connected, but
there is little
variety.
Some transitions
work well, but
some
connections
between ideas
are fuzzy.
The transitions
between ideas
are unclear OR
nonexistent.
Grammar &
Spelling
Student makes
no errors in
grammar or
spelling.
Student makes one
to two errors in
grammar or
spelling.
Student makes
three to four
errors in
grammar or
spelling.
Student makes
more than four
errors in
grammar or
spelling.
Capitalization & Student makes
Punctuation
no errors in
capitalization
or
punctuation,
so the essay is
exceptionally
easy to read.
Student makes one
to two errors in
capitalization or
punctuation, but
the essay is still
easy to read.
Student makes a
few errors in
capitalization
and/or
punctuation that
catches the
reader's
attention and
interrupts the
flow.
Student makes
several errors in
capitalization
and/or
punctuation that
catches the
reader's attention
and interrupts
the flow.
Maximum Points Possible: 100
Student Points:
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16