BAR Ratios: Stop Memorizing Them as Random Fractions
Group ratios by the business question they answer before memorizing the formula.
Liquidity
Liquidity asks whether the company can meet near-term obligations. Common measures include current ratio, quick ratio, and working capital.
Leverage
Leverage asks how heavily the company is financed with debt. Examples include debt-to-equity, debt ratio, and times interest earned.
Activity
Activity ratios ask how efficiently resources are used. Examples include inventory turnover, receivables turnover, and days sales outstanding.
Profitability
Profitability ratios evaluate how effectively the company generates profit, including margins, return on assets, and return on equity.
Interpret direction carefully
Higher is not always automatically better. Extremely high inventory turnover may signal efficiency or insufficient inventory, depending on context.
The takeaway
Learn what the ratio measures before memorizing numerator and denominator.
Related Summit guides
FAQ
Is current ratio a profitability ratio?
No. It is a liquidity ratio.
Does higher debt-to-equity mean more leverage?
Generally yes.
Should I memorize every ratio?
Know formulas emphasized by current BAR materials and understand their interpretation.