Gains:
- Ability to calculate liquidity, profitability, debt and activity ratios with correct formulas and definitions with AI
- Ability to ask AI for a reasoned comment by comparing rates with industry average and time series
- Ability to audit AI's rate calculations and interpretations for definition consistency and input accuracy
Ratio analysis is the art of converting raw numbers in tables into comparable, meaningful indicators by dividing them together. The sentence "The company has a debt of 45 million TL" alone says little; but the sentence "debt/equity ratio is 1.8" describes that the company has almost twice as much debt as its equity and is comparable to the industry. AI accelerates ratio analysis in two ways: on the one hand, it calculates dozens of ratios in seconds, and on the other hand, it interprets these ratios and flags notable deviations. But the most insidious pitfall of ratio analysis is the definition: there is more than one definition of the same ratio, and AI sometimes chooses the wrong denominator or numerator. So the heart of this unit is verifying definition consistency.
In this unit, we will get to know the four rate families, learn how to make AI calculate rates with correct definitions, and compare rates with the sector and time series and make justified comments.
Concepts: Ratio: Division of two financial items. Liquidity: Short-term ability to pay debts. Profitability: The power to generate profit from sales or capital. Debt (leverage): How much of the financing is provided by debt. Activity ratios: How efficiently assets are being turned over.
Four Ratio Families
Ratios answer four basic questions. When asking AI for odds, specifying which family and with which definition you want will prevent miscalculation in the first place.
family
sample rate
Description
what does it say
liquidity
current rate
Current asset / Short-term liability
Can it pay off debt in the short term?
liquidity
acid-test
(Current asset − Stock) / Short-term liability
Can he pay before the stock is sold?
Profitability
Net profit margin
Net profit / Turnover
How much profit remains from each sale?
Profitability
Return on equity (ROE)
Net profit / Equity
How much money does the owner earn?
indebtedness
Debt/Equity
Total debt / Equity
How leveraged is it?
Activity
Receivables turnover rate
Turnover / Avg. trade receivable
How quickly is the receivable collected?
Rule: The meaning of a ratio arises with its definition and basis of comparison. Is it good or bad that the current ratio is 1.4? The answer depends on the industry, past years, and competitors. Therefore, it is necessary to ask AI for both calculation and a basis for comparison.
Attention: The same ratio may have different names and definitions. For example, "leverage ratio" is sometimes total debt/total assets, sometimes total debt/equity. Write clearly to the AI which definition you want; Otherwise, if the AI chooses one definition and you compare it with a different definition, the interpretation will be completely wrong.
Ratio Calculation and Interpretation with AI
Ratio calculation prompt: "Calculate the following ratios from the following 2024 balance sheet and income statement items (thousands of TL) and write the FORMULA you used for each next to it: current ratio, acid-test, net profit margin, ROE, debt/equity, receivables turnover ratio. Just use the numbers I give. [items]"
Time series comment prompt: "Calculate the same rates for 2022, 2023, 2024 and put them in the table. Comment on the 3-year trend (improving/deteriorating/horizontal) of each rate in one sentence and state the reason for the rate that needs the most attention."
Industry comparison prompt: "Compare these ratios to typical ranges for the retail industry. Label the industry range with 'general information, source needed'; do not make up the exact number. Tell me what ratios the company is above/under the industry."
Definition verification prompt: "Write separately the numerator and denominator you use for each ratio you calculate. If there is an alternative common definition, state it so I can make sure I use the same definition when making the comparison."
Weak Prompt / Strong Prompt
WEAK: "Are this company's ratios good?" (Result: undefined, unfounded, an answer like "it looks good overall.") STRONG: "Calculate (write the formulas for) the current ratio, net profit margin, and debt/equity ratio for 2022-2024. Interpret the trend of each ratio, explain what the increase in debt/equity means in terms of financial risk, and come to a single overall soundness judgment."
Mini Cases
Case 1 — Wrong denominator. An analyst has the AI calculate a current ratio; AI mistakenly takes “total debt” as the denominator and finds 0.9, saying “liquidity is weak.” The analyst runs the definition verification prompt; He sees that the denominator should be short-term debt, and in the correct account the ratio is 1.6. The interpretation is reversed: liquidity is actually reasonable. A single denominator error could have overturned the decision.
Case 2 — Margin good, collection bad. A manufacturing company's net profit margin is above the industry at 11%. However, when AI calculates the receivables turnover rate, it is seen that receivables are turned over only 4 times a year, that is, they are collected in an average of 90 days. Comment: profitable but slow to cash; There is a risk of cash crunch while growing. Reading profitability and operating ratio together is much richer than looking at margin alone.
Case 3 — Leverage trap. A company's ROE seems very high at 28%. When AI also calculates the debt/equity ratio, it turns out to be 3.2: high ROE comes from excess debt, not profit. Comment: return is attractive but risk is high; This structure is fragile in case of interest rate increases. AI reads ROE along with leverage, revealing misleading shine.
Tip: Never read the odds in isolation. A high ratio changes meaning when viewed together with another ratio. Ask the AI to interpret the ratios as a “family”: liquidity, profitability, indebtedness, and activity all together.
Ground of Comparison: Three Mirrors
A ratio only gains meaning in a mirror. Asking the AI for all three mirrors gives the most mature interpretation:
- Mirror of time: The company's own history. Is the ratio improving or deteriorating?
- Industry mirror: Similar companies. Where is the ratio according to the sector? (Sector figures provided by AI must be verified.)
- Goal mirror: The company's own budget/covenant goal. For example, has the debt/equity limit in the loan agreement been exceeded?
Common mistakes
- Not stating the definition. If your basis of comparison differs from the definition the AI chooses, the interpretation collapses.
- Reading the ratio alone. If you do not distinguish whether the source of high ROE is profit or leverage, you will be mistaken.
- Not verifying the industry figure. AI can match the industry average; These figures require resources.
- Using end of period instead of average. If the average balance is not used in the receivables/inventory turnover rate, the speed will be incorrect.
- Ignoring the trend. The proportion of one year is photography, the proportion of three years is film; The decision requires a movie.
In summary
Ratio analysis converts the raw figure into a comparable indicator. AI quickly calculates and interprets dozens of ratios, but the biggest risk is incorrect definition. Verify the numerator and denominator of each ratio, read the ratios together as a family, and compare them in three mirrors (time, industry, target). An interpretation given without asking the underlying reason for a high rate may lead you to the wrong decision.
Application task
Give AI a company's three-year summary balance sheet and income statement items. Have the current ratio, net profit margin, ROE, and debt/equity ratio calculated and print the formula for each. Then run the definition verification prompt and check the numerator/denominators. Recalculate at least one ratio manually. Finally, ask the AI to interpret these ratios as “family” and question whether ROE comes from profit or leverage.
checklist
- [ ] I have clearly stated the definition I want for each ratio.
- [ ] I verified the numerator and denominator that the AI used.
- [ ] I recalculated at least one ratio by hand.
- [ ] I read the rates with a trend over at least two years.
- [ ] I questioned the source of ratios like ROE (profit or leverage).
- [ ] I marked the sector figures as "resources required".
- [ ] I interpreted the rates as a family, not individually.