FRM: Financial position analysis

Explanations, applications and practice for financial position analysis.

• Interest coverage and cash payment capacity

  Distinguish an earnings-based quotient from the timing of cash available for a payment.

  Comparisons

• Current, quick and cash ratios: comparing the numerators

  Identify which current assets enter each stated measure.

  Comparisons

• Net working capital and current ratio

  Separate an amount difference from a relative balance-sheet measure.

  Comparisons

• Retained earnings and cash are different balances

  Distinguish an accumulated equity component from a liquid asset.

  Concepts

• Accounting equation: assets, liabilities and equity

  Read the accounting equation: assets, liabilities and equity formula, variables and scope.

  Formulas

• Cash ratio including short-term marketable securities

  Read the cash ratio including short-term marketable securities formula, variables and scope.

  Formulas

• Common-size balance-sheet percentage

  Read the common-size balance-sheet percentage formula, variables and scope.

  Formulas

• Current ratio: current assets divided by current liabilities

  Read the current ratio: current assets divided by current liabilities formula, variables and scope.

  Formulas

• Debt-to-assets ratio with a matching denominator

  Read the debt-to-assets ratio with a matching denominator formula, variables and scope.

  Formulas

• Debt-to-equity ratio and its debt definition

  Read the debt-to-equity ratio and its debt definition formula, variables and scope.

  Formulas

• Interest coverage using EBIT

  Read the interest coverage using ebit formula, variables and scope.

  Formulas

• Net working capital: current assets less current liabilities

  Read the net working capital: current assets less current liabilities formula, variables and scope.

  Formulas

• Quick ratio with explicit asset components

  Read the quick ratio with explicit asset components formula, variables and scope.

  Formulas

• Balance-sheet assets, liabilities and equity

  Read the accounting equation and distinguish recognised balances from a complete business valuation.

  Lessons

• Reading a common-size balance sheet

  Scale statement items by total assets while preserving accounting and measurement context.

  Lessons

• Liquidity ratios and the quality of current assets

  Compare defined numerators while retaining timing, collectability and financing context.

  Lessons

• A rising goodwill percentage does not identify its cause

  Separate changes in the numerator from changes in the asset denominator.

  Common mistakes
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  Liquidity ratios calculator

  Calculate current, quick and cash ratios from explicit current-asset components.

  Tools

• Building and reconciling a common-size balance sheet

  Divide each selected amount by the same asset base without counting subtotals twice.

  Worked examples

• Why paying current debt can raise the current ratio and lower the cash ratio

  Trace both numerator and denominator changes in a stated cash repayment.

  Worked examples

• How the debt definition changes a leverage ratio

  Compare interest-bearing debt with total liabilities using the same equity base.

  Worked examples

• Comparing current, quick and cash ratio components

  Use one liability denominator and three explicitly defined numerators.

  Worked examples

• Interpreting debt ratios when equity is negative

  Identify why a negative debt-to-equity quotient is not a low-leverage signal.

  Worked examples

• Reconciling assets, liabilities and retained earnings

  Use the accounting equation and explicit equity-component assumptions.

  Worked examples