Financial Health Metrics
These metrics focus on a company's balance sheet — whether it can meet its obligations, how much it relies on debt, and how resilient it would be under stress.
Equity Ratio
Shareholders' equity ÷ Total assets × 100
Shows what portion of total assets is funded by equity that doesn't need to be repaid — the most basic gauge of financial stability.
Strengths: Simple and intuitive; a rough proxy for insolvency risk.
Watch out for: What counts as a healthy level varies a lot by industry (financial companies are naturally low, for example).
Combine with: Debt-to-equity ratio and ROE (an unusually high equity ratio can also signal inefficient use of capital).
Current Ratio
Current assets ÷ Current liabilities × 100
Shows whether liabilities due within a year can be covered by assets that can be converted to cash within a year. 200%+ is often considered a healthy benchmark.
Strengths: A quick check on short-term liquidity.
Watch out for: Can overstate real liquidity if a large share of current assets is inventory that isn't easily or quickly sold.
Combine with: Quick ratio (a stricter version that excludes inventory).
Quick Ratio
Quick assets (cash, receivables, etc. — excluding inventory) ÷ Current liabilities × 100
A stricter version of the current ratio that checks whether short-term debts can be covered by assets that can be turned into cash almost immediately.
Strengths: A more conservative safety check that isn't distorted by the quality (or saleability) of inventory.
Watch out for: Can look artificially low in industries (like retail) where holding substantial inventory is a normal and healthy part of the business.
Combine with: Current ratio and inventory turnover.
Interest-Bearing Debt Ratio
Interest-bearing debt ÷ Total assets (or shareholders' equity) × 100
Shows how reliant a company is on loans, bonds, and other debt that carries interest.
Strengths: Gives a quick sense of overall financial risk.
Watch out for: In a low-interest-rate environment, actively using debt can be a rational management choice — lower isn't automatically better.
Combine with: Interest coverage ratio and net debt-to-equity ratio.
Debt-to-Equity Ratio, D/E
Interest-bearing debt ÷ Shareholders' equity
The classic measure of leverage — how much debt a company carries relative to shareholder capital.
Strengths: Useful for weighing financial risk against the leverage boost it can give to ROE.
Watch out for: Comparing raw D/E ratios across industries with very different capital needs (capital-intensive vs. asset-light) can be misleading.
Combine with: Interest coverage ratio and ROE.
Interest Coverage Ratio
Operating profit (or EBIT) ÷ Interest expense
Shows how many times over a company's core earnings could cover its interest payments — a direct test of debt-servicing capacity.
Strengths: Goes beyond the debt level itself to show actual ability to keep making interest payments.
Watch out for: Can drop sharply after a temporary earnings downturn, so it's worth checking the trend over several years, not one snapshot.
Combine with: D/E ratio and the stability of the operating margin over time.
Net Debt-to-Equity Ratio
(Interest-bearing debt − Cash and equivalents) ÷ Shareholders' equity
Nets cash holdings against debt to show the 'real' leverage burden.
Strengths: More accurate than a plain D/E ratio for companies sitting on large cash piles.
Watch out for: If a company genuinely needs that cash for day-to-day operations, subtracting it entirely can understate real risk.
Combine with: D/E ratio and cash ratio.
Fixed Asset Ratio / Fixed-Long-Term Conformity Ratio
Fixed asset ratio = Fixed assets ÷ Equity × 100. Fixed-long-term conformity ratio = Fixed assets ÷ (Equity + Fixed liabilities) × 100.
Checks whether long-lived assets are funded by equity (or long-term capital), rather than by short-term borrowing.
Strengths: Helps spot a dangerous funding mismatch — buying long-term assets with short-term money.
Watch out for: Can temporarily worsen right after a major capital investment, so a single year's reading shouldn't be over-interpreted.
Combine with: Equity ratio and current ratio.
Cash Ratio
(Cash and equivalents + short-term securities) ÷ Current liabilities × 100
The most conservative liquidity test — whether short-term debts could be covered by cash alone, excluding both inventory and receivables.
Strengths: Useful for gauging resilience in a genuine crisis scenario.
Watch out for: An unusually high cash ratio can also indicate the company isn't putting its capital to productive use (poor capital efficiency).
Combine with: Current ratio, quick ratio, and ROE.