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Ratios Solvency Ratios: Interest Coverage Ratio The interest coverage ratio is used to determine how easily a company

can pay interest expenses on


outstanding debt. The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable

Debt to Asset ratio The debt ratio compares a company's total debt to its total assets, which is used to gain a general idea as to
the amount of leverage being used by a company. low percentage means that the company is less dependent on leverage, i.e., money borrowed from and!or owed to others. The lower the percentage, the less leverage a company is using and the stronger its equity position. "n general, the higher the ratio, the more ris# that company is considered to have ta#en on

Debt to equity ratio/Debt to Capital The debt$equity ratio is another leverage ratio that compares a company's total liabilities to its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligors have
committed to the company versus what the shareholders have committed. To a large degree, the debt$equity ratio provides another vantage point on a company's leverage position, in this case, comparing total liabilities to shareholders' equity, as opposed to total assets in the debt ratio. %imilar to the debt ratio, a lower the percentage means that a company is using less leverage and has a stronger equity position.

Liquidity ratios Current Ratio& The current ratio is a popular financial ratio used to test a company's liquidity by deriving the proportion of current assets available to cover current liabilities. The concept behind this
ratio is to ascertain whether a company's short$term assets 'cash, cash equivalents, mar#etable securities, receivables and inventory( are readily available to pay off its short$term liabilities 'notes payable, current portion of term debt, payables, accrued expenses and taxes(. "n theory, the higher the current ratio, the better.

Quick Ratio& The quic# ratio $ is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities.
The quic# ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position.

Cash Ratio& The cash ratio is an indicator of a company's liquidity that further refines both the current ratio and the quic# ratio by measuring the amount of cash, cash equivalents or invested funds there are in
current assets to cover current liabilities.

De ensive Interval Ratio The )"* is thought by many people to be a better liquidity measure than the quic# and current ratios. +ecause these ratios compare assets to liabilities rather than comparing assets to expenses, the )"* and current!quic# ratios would give quite different results if the company had alot of expenses, but no debt. The )"* is not a replacement to the other ratios, but a omplement.

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