10 pages carry this tag.
Return on equity is one number, but it is built from three. Until you split it apart, a high ROE and a fragile ROE look exactly the same.
A company can fund itself entirely with equity, entirely with debt, or with some mix of both.
Solvency ratios answer: can this company survive the long run? Is the debt manageable relative to earnings power and asset base?
The debt to equity ratio compares borrowed money with shareholders' money. It shows how much of the business is financed by lenders who must be paid whether or not there is profit.
Interest coverage shows how many times over a company can pay its interest bill out of operating profit.
The quick ratio checks whether a company holds enough cash and liquid investments to pay the obligations coming due in the next few months, even in an emergency.
The current ratio compares everything a company expects to turn into cash within a year with everything it must pay within a year. It is the broadest measure of short-term solvency.
Net debt to EBITDA tells you how many years of operating cash profit it would take to repay all borrowings, net of cash on hand. It is the leverage measure lenders and rating agencies actually use.
A measure of a company's financial leverage, showing the proportion of debt used to finance assets relative to shareholders' equity.
Measures how easily a company can pay interest on its outstanding debt. Higher is better. Ratio below 1.5 is concerning. Companies with low coverage may struggle during downturns. Look for consistent coverage above 3.
Related topics: Valuation, DCF, Relative Valuation, Cost of Capital, Financial Statements, Cash Flow, Earnings Quality, Red Flags
