Accounting · Lesson Plan

Financial Ratio Analysis

Financial statements at face value don’t tell you how well a company is really doing — ratios do. This lesson introduces ratio analysis: how shareholders and creditors use standard ratios to judge a company’s liquidity, profitability, and leverage, how each ratio is calculated from the statements, and how to interpret what the numbers mean. Students calculate and interpret a set of ratios for a sample company.

Grades 11–12 / College Lesson Plan 45–60 minutes Free Lesson Plan Lesson & Worksheet: Full Membership

Financial ratio analysis lesson illustration

For Teachers

Lesson at a glance

Topic: Accounting
Grade Level: Grades 11–12 / College
Resource Type: Lesson + Worksheet
Estimated Time: 45–60 minutes
Format: Lesson + worked example
Materials: Printable lesson, worksheet, pencils

What Students Learn

Learning objectives

Explain the purpose of ratio analysis
Calculate standard liquidity, profitability, and leverage ratios
Read ratios from the income statement and balance sheet
Interpret what a ratio reveals about a company
Compare a company’s ratios to judge performance

Materials

What you’ll need

Printed lesson and worksheet (one per student)
Calculator
Pencils

Key Terms

Vocabulary

Ratio analysis: Calculating ratios from statements to judge a company.
Liquidity: How easily a company can pay its short-term debts.
Profitability: How much profit a company earns relative to its size.
Leverage: How much a company relies on borrowed money.
Current ratio: Current assets divided by current liabilities.
Shareholder: A person who owns part of a company.

For Teachers

Lesson plan

Estimated time: one 45–60 minute class period.

Lesson sequence

Why ratios? (10 min). Why face-value statements aren’t enough for investors and creditors.
The standard ratios (15 min). Liquidity, profitability, and leverage ratios and their formulas.
Interpreting (12 min). What each ratio reveals about a company.
Worksheet (13 min). Students calculate and interpret ratios for a sample company.

Assessment

Assess the worksheet for accurate ratio calculations and sound interpretation.

Discussion

Discussion questions

Why isn’t a financial statement enough on its own?
What does the current ratio measure?
How do creditors use ratio analysis?
What’s the difference between liquidity and profitability?
How would you judge a company from its ratios?

Printable Lesson & Worksheet