Learn Calculating Financial Ratios | Analyzing Financial Data

Understanding financial ratios is essential for accountants who want to evaluate a company's performance and financial health. Ratios such as gross margin and current ratio allow you to quickly assess profitability, liquidity, and operational efficiency. By comparing these ratios over time or against industry benchmarks, you can uncover trends, identify strengths and weaknesses, and make more informed business decisions. These insights are crucial for budgeting, forecasting, and communicating financial results to stakeholders.


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import pandas as pd

# Example financial statement data
data = {
    "Revenue": [200000, 150000, 180000],
    "Cost_of_Goods_Sold": [120000, 90000, 110000],
    "Current_Assets": [80000, 70000, 90000],
    "Current_Liabilities": [40000, 35000, 45000]
}
df = pd.DataFrame(data)

# Calculate gross margin
df["Gross_Margin"] = (df["Revenue"] - df["Cost_of_Goods_Sold"]) / df["Revenue"]

# Calculate current ratio
df["Current_Ratio"] = df["Current_Assets"] / df["Current_Liabilities"]

print(df[["Gross_Margin", "Current_Ratio"]])

To understand how these ratios are computed, start with the formulas:

Gross Margin Ratio: (Revenue - Cost of Goods Sold) / Revenue;
Current Ratio: Current Assets / Current Liabilities.

In Python, you use pandas to perform these calculations efficiently. Subtract the Cost_of_Goods_Sold from Revenue for gross profit, then divide by Revenue for the gross margin. For the current ratio, simply divide Current_Assets by Current_Liabilities. By applying these formulas to each row in a DataFrame, you can analyze multiple periods or companies at once.


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import pandas as pd

# Sample DataFrame with financial data
df = pd.DataFrame({
    "Revenue": [300000, 250000],
    "Cost_of_Goods_Sold": [180000, 150000],
    "Current_Assets": [120000, 100000],
    "Current_Liabilities": [60000, 50000]
})

# Add Gross Margin Ratio column
df["Gross_Margin"] = (df["Revenue"] - df["Cost_of_Goods_Sold"]) / df["Revenue"]

# Add Current Ratio column
df["Current_Ratio"] = df["Current_Assets"] / df["Current_Liabilities"]

print(df)

1. Why are financial ratios important for accountants?

2. Which pandas operation allows you to create a new column based on existing data?

3. Fill in the blanks to calculate a gross margin ratio and add it as a new column.

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              123456789101112131415161718
            
import pandas as pd

# Example financial statement data
data = {
    "Revenue": [200000, 150000, 180000],
    "Cost_of_Goods_Sold": [120000, 90000, 110000],
    "Current_Assets": [80000, 70000, 90000],
    "Current_Liabilities": [40000, 35000, 45000]
}
df = pd.DataFrame(data)

# Calculate gross margin
df["Gross_Margin"] = (df["Revenue"] - df["Cost_of_Goods_Sold"]) / df["Revenue"]

# Calculate current ratio
df["Current_Ratio"] = df["Current_Assets"] / df["Current_Liabilities"]

print(df[["Gross_Margin", "Current_Ratio"]])