Microsoft's balance-sheet strength, live
MSFT — Debt/Equity. Open MSFT on the Ledge to see current values.
Current, quick, and interest-coverage ratios
| Ratio | Formula | Good Sign |
|---|---|---|
| Current Ratio | Current Assets / Current Liabilities | Above 1.5 (can cover bills with room to spare) |
| Quick Ratio | (Current Assets - Inventory) / Current Liabilities | Above 1.0 (can pay without selling inventory) |
| Interest Coverage | EBIT / Interest Expense | Above 3.0 (earnings easily cover debt payments) |
The current-ratio formula
Current Ratio = Current Assets / Current Liabilities
Why a current ratio below 1.0 is a red flag
A current ratio below 1.0 means the company has more short-term bills than short-term resources. That is a red flag requiring investigation.
Compare a healthy company to a stressed one
Find the Current Ratio and Interest Coverage for MSFT (healthy) and compare to a company under stress.
Liquidity is survival, not just profit
Does an undrawn credit line change the picture?
A company has current ratio 0.7 (current liabilities > current assets) but maintains a $5B undrawn revolving credit facility that rolls for another 4 years. Liquidity crisis?
Check your understanding
Sit with the ideas.
A company has current assets of $800M, current liabilities of $1.2B, and annual interest expense of $100M with EBIT of $300M. What are its current ratio and interest coverage?
Why: