Debt-to-Equity Ratio: Which debts did you include in the numerator?

The debt-to-equity ratio commonly referred to in Korea is total liabilities ÷ total equity × 100. If a hypothetical company has total liabilities of 100, and equity of 200, it is 50%. However, Debt/Equity in overseas data sometimes uses only interest-bearing short-term and long-term borrowings as the numerator. If those borrowings are 40, the same company is displayed as 20%.

Check whether accounts payable, accrued expenses, and contract liabilities are included in interest-bearing debt, and how lease liabilities are treated. Do not immediately assume an error if the calculation does not match; verify the numerator scope, consolidation basis, and reference date. If equity is small or negative, simple comparisons of this ratio are difficult.

Current Ratio: Do you have assets to cover near-term maturities?

The current ratio is current assets ÷ current liabilities × 100. If current assets are 120, and current liabilities are 60, it is 200%, or 2 times. This compares assets to be recovered or used within 1 year or a normal operating cycle with obligations to be repaid; it is not an indicator that compares only cash.

If there is a large amount of slow-moving inventory and difficult-to-collect receivables, a high ratio is not a strong basis for reassurance. The quick ratio focuses on relatively liquid assets such as cash, short-term financial assets, and accounts receivable, while the cash ratio focuses on cash and short-term financial assets. Check the detailed definitions provided by each source.

Interest Coverage Ratio: How many times can you cover interest expenses?

The standard calculation is EBIT (earnings before interest and taxes) ÷ interest expense. Domestic screens sometimes use operating profit ÷ interest expense, so do not assume the two numerators are identical. If hypothetical EBIT is 40, and interest expense is 5, it is 8 times, and if the same ratio is expressed as a percentage, it is 800%.

Therefore, the value displayed as 28,000% is 280 times, not 28,000 times, assuming the same definition. If the denominator, interest expense, is very small, the ratio can become very large. Check whether net interest expense is used and if it is calculable when 0 or negative.

A ratio of less than 1 times is a signal that earnings for that period are less than interest expenses, but it does not necessarily mean immediate bankruptcy. You must look at cash on hand, asset disposal, and refinancing capacity; a high ratio also does not guarantee the ability to repay principal.

After the ratios, read the maturities and contracts.

Even if total debt is the same, the risk differs between a company that must repay most of it next month and one where repayments are spread over several years. Variable-rate borrowings are affected by interest rate hikes, and foreign currency borrowings are affected by exchange rate fluctuations. Collateral and financial covenant violations can change repayment terms.

There is no universal passing grade that applies to all industries.

Banks operate based on liabilities like deposits, so it is difficult to compare their debt-to-equity ratio directly with that of a general manufacturing company. Unearned revenue in subscription businesses also differs in nature from bank borrowings. Consider the industry, business cycle, and cash flow stability together.

Examine whether the company can handle interest and principal payments assuming a decline in sales or an increase in interest rates. A high current ratio at a single point in time may be less important than actual recoverability and trends over multiple quarters.

Check what you have read.

• Is it total liabilities or interest-bearing borrowings?
• Did you distinguish between percentages and multiples?
• Can the inventory and receivables actually be collected?
• Have you checked the maturity, interest rate, and collateral covenants?

Apply what you read to the actual screen

Try it on WAPE

Recommended for continued reading.