Assess debt-to-equity, current ratio, and interest coverage; classify balance sheet risk
Answers how financially fragile or resilient a company's balance sheet is. It reads leverage and liquidity metrics (debt-to-equity, current ratio, interest coverage, cash, total debt) and scores them into a 0-100 risk read labeled low-risk, moderate-risk, or elevated-risk. Use it to flag companies vulnerable to a downturn or rising rates, where heavy debt or thin coverage could force distress, versus those with the cushion to weather stress.
Leverage and liquidity ratios - the oldest quantitative analysis in finance, and the reason a ratio means nothing without an industry attached.
THE RATIOS.
DEBT-TO-EQUITY is total debt over shareholders' equity. It measures how much of the asset base is funded by borrowing rather than by owners. Leverage magnifies returns in both directions: it raises return on equity when the business earns more than its cost of debt, and accelerates losses when it does not.
CURRENT RATIO is current assets over current liabilities - can obligations due within a year be met by assets convertible within a year. Below 1 is not automatically distress; it is normal for businesses that collect cash before paying suppliers. The QUICK RATIO, which excludes inventory, is the stricter version and matters where inventory is slow-moving.
INTEREST COVERAGE is operating income (EBIT) divided by interest expense - how many times over the company can pay its interest from operations. It is the most direct solvency measure of the three, because failing to pay interest is what actually triggers default. Coverage near or below 1 means operating earnings do not cover the interest bill.
THE ACADEMIC CONSTRUCT. Altman's Z-score (1968) is the canonical work: a discriminant model combining five ratios covering liquidity, cumulative profitability, operating efficiency, leverage and asset turnover, fitted to distinguish firms that went bankrupt from those that did not. Worth teaching for two reasons - it shows what a properly validated composite looks like, with stated coefficients and a measured classification accuracy, and it shows the limits, since it was estimated on US manufacturers of a particular era and has needed re-estimation for other sectors and periods.
THE LIMIT THAT MATTERS MOST HERE. These ratios are NOT COMPARABLE ACROSS INDUSTRIES. A bank's balance sheet is leverage by design. A utility carries heavy debt against regulated, predictable cash flows and is not fragile for it. A software company with negligible debt is not therefore strong. Any absolute threshold on debt-to-equity is implicitly a statement about one kind of business - so read these against sector peers, which this analysis does not do.
TWO ARITHMETIC TRAPS. Book equity can be small or NEGATIVE after years of buybacks or accumulated losses, which makes debt-to-equity explode or invert on companies that are not in distress - so check the denominator before believing the ratio. And book values are historical cost, so an asset base bought decades ago may bear little relation to what it is worth.
WHAT THESE RATIOS CANNOT SEE. Off-balance-sheet obligations, debt maturity schedules - a company with modest leverage and a large maturity next quarter is in a different position from one with the same leverage due in ten years - and whether the debt is fixed or floating rate, which determines exposure to rate rises.
The 0-100 score and the low/moderate/elevated bands are our own convention.
Published reports are readable without an account. The newest is Ether (ETH) and XRP extend a month-long slide as Bitcoin falls below $75,000: trend, momentum and news (Nov 9, 2026). Create an account to run research on the stocks and crypto you choose.