Financial Ratios and Their Uses

What this video covers

• The current ratio formula (current assets divided by current liabilities), why inventory counts in it, and why a result greater than 1.0 signals adequate short-term solvency
• The quick ratio (acid-test ratio) formula, why it subtracts inventory from current assets before dividing by current liabilities, and why it is always equal to or less than the current ratio for the same company
• Net working capital as current assets minus current liabilities, why it yields a dollar amount rather than a ratio, and why it cannot replace the current ratio when comparing companies of different sizes
• The debt-to-equity ratio and how leverage amplifies both gains and losses for equity holders, plus the exam distinction that leverage is entirely separate from liquidity
• The debt service coverage ratio: operating income divided by total debt service, and why it can point in the opposite direction of debt-to-equity
• Why every ratio requires benchmarking against peers, competitors, or historical trends, and why even a current ratio below 1.0 is not automatic proof of bankruptcy