Do we really have to memorise all the financial ratios?

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arty

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Hi guys,
There are at least 20 over ratios in the FSA syllabus.
Do we really have to squeeze every single bit of them into our brain cells?
Gosh.. i am going crazy over the ratios!
Can someone who done June exam before maybe give a brief intro which ones are those most likely to appear?
ROE, DuPont are 2 likely candidates.
Not really wanting to spot questions as all are “fair game” to CFA exam setters but really can’t squeeze that much into my brain esp considering there are so much more in other sections to memorise as well.
Thanks.
 
bad news arty, you’ve got to know them all.
I’ll speculate the most likely ratios you’ll see on the exam will be
1) DuPont (basic and/or extended)
2) cash conversion cycle
3) current ratio vs. quick ratio
4) interest coverage
5) asset turnover (particularly how depreciation method affects this)
6) inventory turnover (particularly how inventory accounting method affects this)
7) gross profit (particularly how inventory accounting method affects this)
If you barely squeak by on LI, you’ll regret it at LII when you have to understand how changes in foreign exchange rates impact these ratios when consolidating the results of foreign subsidiaries using the temporal and all-current methods.
You need to know everything for this exam, and for those that follow.
Maybe write a bunch of them down and post them on your wall until you learn them, or if you need a quick break from your work while at the office, quickly test yourself on the ratios.
You still have plenty of time to learn this all, good luck.
 
I would qualify this comment by saying that a true understanding is far more important than rote learning - you are far more likely to be tested on how (for example) capitalising interest affects interest coverage than the intricate definitions of FFC coverage vs CF coverage.
 
If I were a betting man, I’d put my money on only memorizing HPR.
 
i’m currently taking the schweser online prep course and the prof pretty much said if its in the study guides, it’ll most likely be on the exam in one form or another. And most of the formulas i’ve seen in the cfa cirriculum are in schweser
i’m with you arty, its definately overwhelming but i try to maintain positive and keep telling myself that knowing the formulas will benefit me beyond the cfa exam. just keep pounding study/sample questions. thats what helps me.
good luck!
 
You have to know them in the course of business anyways, so why not learn them?
You think people in equity research complain about having to memorize ratios? HA
 
Does anyone have a practical document showing practical use of the ratios? Is there a link you can provide showing these ratios in action?
 
I wrote L1 in June and I agree with the above. Know and understand it all.
I don’t really understand the question about the practical use of the ratios. Aren’t they by definition practical? Liquidity ratios tell you about a company’s liquidity. Solvency ratios tell you about solvency. If you can be more specific maybe we can post something that will help.
 
I was just wondering if there is a way to, lets say, search Yahoo Finance for a company, and some ratios will pop up in their financial section for the public to view. Because I don’t have too much experience with accounting, and just wanted to see it in a live situation. Perhaps ratios are used only behind the scenes, though, not really used by the general public.
 
BB -
if you’re interested in learning how to apply the ratios, a good way get started is to do a quick fundamental ratio comparison of two competing companies, like Coke and Pepsi. could be a worthwhile exercise if the material is new to you.
go to a site like moneycentral.com, smartmoney.com, yahoo finance. they have all the ratios right there for you. some of the sites even have simple analyst reports summarizing the info. look over the ratios and conclude which company is in better financial condition based on liquidity, solvency, mgmt effectiveness, profitability. do trend analysis over the course of a few yrs to see if the co. is getting better or worse. you can use your fsa book as a guide to help interpret what the ratios mean.
not sure if you have the time for all that, but it would help you learn the material. it’s a pretty standard project to do in undergrad and bschool.
 
Great suggestion xavier. This is what really makes the material concrete in my mind. Actual practical, live examples, not just textbook words. I was not a finance undergrad so this is all pretty new. I will do this, thanks again!
 
That’s a good suggestion just to get comfortable with looking at these numbers but as you start learning more stuff it becomes harder and harder to use companies as diverse as these for learning FSA. For example, if you could make cash flow from indirect method and direct method tie out from Coke’s 10-K statements I would be astounded. Coke’s corporate structure is very complicated with dozens of subsidiaries, affiliated companies, different currencies, probably all kinds of off-balance sheet stuff, etc.. If you’re trying to do real world examples of lots of this stuff, it’s easier to go find very small companies with uncomplicated finances. It may not seem as cool, but understanding Coke’s finances is a serious undertaking.
Try finding companies with one product and < $50M in revenue (KO has like $25B in revenue).
 
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