Fundamental Analysis

Ratios & Earnings Quality

Turn the statements into diagnostic ratios — returns on capital, leverage, liquidity, cash coverage — and learn the way each one deceives. Stop reading numbers; start diagnosing earnings quality.

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StartLesson 1 · What Ratios Really Tell You

What you’ll leave with12 lessons · 12-line playbook

I never read a ratio alone — I benchmark it against time, peers, and a rule of thumb, then check what could be distorting it.
ROE can be bought with debt — I check ROA and ROIC to see whether returns are earned or borrowed.
When ROE moves, I decompose it — margin, turnover, leverage — to see which lever moved and whether it's quality or risk.
I read asset turnover by sector — and I check whether high turnover is real efficiency or just an old, written-down asset base.
I check the quick and cash ratios behind the current ratio, and I never confuse liquidity with solvency.
I size leverage against earnings — net-debt/EBITDA and interest coverage — not in the absolute, and I check the maturity wall.
I test solvency and value in cash — coverage, conversion, FCF yield — and check whether strong cash ratios came from starving capex.
I measure the accruals ratio, not just eyeball NI vs CFO — high and rising accruals with flat growth means the profit is on paper.
I score manipulation risk across a cluster of signals, not a single flag — a high score means dig deeper, not convict.
I rebuild the GAAP number from management's adjusted bridge — I keep recurring "one-time" charges and stock comp in, and strip only the genuinely one-off.
Before I compare two ratios I normalize for policy, sector, size, one-offs and period — a raw comparison across any of those is a trap.
I diagnose a company by its returns, the quality of those returns, and what survives normalization — the headline is where I start, never where I stop.

Ratios & Earnings Quality

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