Ratios that reveal financial strength
Question
Which ratios would you use to assess a company's financial health?
Short answer
Liquidity, leverage, coverage and profitability. Liquidity: current and quick ratios. Leverage: debt-to-equity and net debt to EBITDA. Coverage: interest cover (EBIT over interest). Profitability and efficiency: margins, ROE and ROA, and working-capital days; cash-flow measures such as operating cash flow to debt are also key.
Adapted from Crack, Heard on the Street, Q5.4.10, p.53; question and answer rewritten by SelfMadeQuant.com.
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