What this unit covers
Learn to calculate the debt and liquidity ratios that show whether a company is financially fragile or sound, using a worked example.
By the end you will be able to
- Calculate a company's debt-to-equity ratio and explain what it reveals about how it is financed.
- Calculate a company's current ratio and explain what it reveals about short-term survival.
- Tell visibility signals like revenue and growth apart from safety signals like debt and liquidity.
How it starts: Two Companies, One Question
- You compare two companies before moving your savings into one.
- Both report rising sales and both are mentioned often in the news.
- Which one could still pay its bills if next year turned bad?
Words you will meet
- Debt-to-Equity Ratio
- Total debt divided by total equity, showing how much of the business runs on borrowed money.
- Current Ratio
- Current assets divided by current liabilities, showing if near-term bills are covered.
- Equity
- The money owners have put into the business, as opposed to borrowed money.
- Current Assets
- What a company can turn into cash within roughly a year.
- Current Liabilities
- What a company owes and must pay within roughly a year.
In this module: Measuring Business Performance
- The Most Important Financial Ratios
- Profitability & Efficiency
- Debt, Cash & Financial Health (this unit)
- Red Flags Every Investor Should Know
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