From the course: Corporate Financial Statement Analysis

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Rethink the current ratio in today’s context

Rethink the current ratio in today’s context

From the course: Corporate Financial Statement Analysis

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Rethink the current ratio in today’s context

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As we previously stated, step one in financial statement analysis is computing return on equity, and then step two, breaking that ratio down using the DuPont framework into its component parts of profitability, efficiency, and its leverage components. We're now going to hone in on the leverage component of return on equity. Now there are a host of different types of leverage ratios, all getting at a measure of how certain classes of assets are being financed. There are as many different types of leverage ratios as there are colors in the rainbow. You have debt ratio, debt to equity ratio, your assets to equity ratio, your long-term debt to assets ratio, and that's just to name a few. And this highlights a major point. Since there are no rules with regard to ratios, you have to be careful to ensure you know what number is being divided by what other number. It does very little good to compare one company's debt ratio to another company's assets to equity ratio. Even though both are…

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