Part 2 · Balance sheet: a company's list of belongings · Lesson 10
Gauging safety with debt and liquidity ratios
Is there a lot of debt? Is there money to pay what's due soon? Can it handle the interest? A few balance sheet numbers measure a company's stamina.
QToday's question
They say a company with a debt-to-equity ratio above 200% is risky, yet the average for electricity and gas companies is above 300%. Is that whole industry risky?
Judging a company by its debt-to-equity ratio alone is often wrong. Only when you measure the size of debt, the money due within a year, and the interest burden separately, and compare with the same industry, does 'how sturdy it is' become visible.
MAPLearning map for this lesson
We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.
In Lesson 1 you learned that the balance sheet is a year-end 'snapshot', and in Lesson 5 that the snapshot sits inside III. Financial Matters. From Lesson 6 to Lesson 9 you took apart assets, liabilities and equity one by one. This lesson ties those numbers together with a few divisions to measure a company's stamina. The interest burden connects to the interest rate discussion in Learn (Economics) Lesson 12.
- STEP 1 · Basic conceptsFour rulers for measuring safety
Calculate the , , , and yourself using Robin Bakery's numbers.
- STEP 2 · Understanding the logicOne number is not enough
Know what each ratio misses, and look at the interest burden as well with the .
- STEP 3 · Real-world applicationSide by side with the industry average
Compare with Bank of Korea industry averages to judge whether a company is sturdy 'for its industry,' and pick out warning signs.
STEP 1Four rulers for measuring safety
All you need to do is divide a few big balance sheet numbers. Let's calculate them one by one with Robin Bakery.
Just as a health checkup has set measurements like blood pressure, blood sugar and cholesterol, a company's financial stamina has commonly used measurements. The core is three questions: 'How much debt does it carry?', 'Does it have money to pay what's due within a year?', and 'Can it pay the interest?' All of them are found by dividing numbers from the balance sheet and income statement. Let's pull out Robin Bakery's numbers from Lessons 6–9 again (a fictional company).
| Item | Amount | Where you learned it |
|---|---|---|
| Current assets (in KRW 100 million: cash 8 + trade receivables 10 + inventories 9 + other 3) | KRW 3 billion | Lesson 7 |
| Non-current assets | KRW 7 billion | Lesson 7 |
| Current liabilities (in KRW 100 million: trade payables 8 + short-term borrowings 6 + advances received 3 + other 3) | KRW 2 billion | Lesson 8 |
| Non-current liabilities (in KRW 100 million: long-term borrowings 15 + other 5) | KRW 2 billion | Lesson 8 |
| Equity | KRW 6 billion | Lesson 9 |
| Operating profit / interest expense (assumed) | KRW 1.5 billion / KRW 100 million | Lesson 1 · this lesson |
Debt-to-equity ratio: other people's money vs yours
The is liabilities divided by equity. For Robin Bakery it is KRW 4 billion ÷ KRW 6 billion ≈ 67%. If the money shareholders put in plus retained profit is 100, it means 67 is borrowed or must be repaid. The higher it is, the less room equity has to withstand the same shock. However, as you learned in Lesson 8, liabilities include both interest-bearing borrowings and non-interest-bearing items such as trade payables and advances received. So the debt-to-equity ratio alone cannot tell you how much 'bad debt' there is.
Current ratio and quick ratio: ability to pay within a year
The is assets that will turn into cash within a year divided by liabilities due within a year. KRW 3 billion ÷ KRW 2 billion = 150%, so the money coming in soon is 1.5 times the debt due now. But of the current assets, the KRW 900 million of inventory has to be sold to become cash. Bread inventory sells in a day or two, but inventory of out-of-fashion electronics may not sell even at a fire-sale price. So the version recalculated without inventory is the . (KRW 3 billion − KRW 900 million) ÷ KRW 2 billion = 105%, a level where short-term debt can be repaid even if no inventory is sold at all.
Borrowings to total assets: share of assets that is 'interest-paying debt'
is the share of interest-bearing borrowings (short- and long-term borrowings and bonds) in total assets. For Robin Bakery it is (KRW 600 million + KRW 1.5 billion) ÷ KRW 10 billion = 21%. If the debt-to-equity ratio looks at 'all debt', borrowings to total assets picks out only the debt whose burden grows directly when rates rise. The Bank of Korea also publishes the debt-to-equity ratio and borrowings to total assets side by side when assessing corporate stability.
Quick checkIf Robin Bakery borrows another KRW 1 billion from a bank for a 1-year term and holds it as cash, what happens to the current ratio?
STEP 2One number is not enough
Each of the four rulers looks at a different thing. Move the numbers yourself and you will quickly see what each ruler misses.
The calculator below starts from Robin Bakery's numbers. Try creating situations yourself: more inventory, more short-term borrowings, or a big loss that shrinks equity. The green, yellow and red zones of the bar are just general reference ranges that many analysts use as a rough starting point, not pass marks set by law or accounting standards. You will see with real statistics in STEP 3 that the benchmarks differ a lot by industry.
This is a simple model built from the fictional Robin Bakery's numbers. It assumes that as inventories rise, cash and trade receivables turn into inventories (total current assets unchanged), that only 25% of added short-term borrowings stays as cash and the rest is spent on equipment, and that 30% of equity lost to a deficit comes out of current assets and the rest from non-current assets. The colored zones are general reference ranges and vary by industry.
Interest coverage ratio: how many times can it pay the interest?
Even with the same debt-to-equity ratio, the burden differs between a company paying 3% interest and one paying 8%. So we also use income statement numbers. The is operating profit divided by interest expense. If we assume all of Robin Bakery's non-operating loss of KRW 100 million is interest expense (hypothetical), KRW 1.5 billion ÷ KRW 100 million = 15x. That works out to about 4.8% annual interest on KRW 2.1 billion of borrowings. Core earnings are 15 times the interest, so there is room even if rates double.
Conversely, if this value is below 1x, the core business does not earn enough to pay even the interest. A company in that state for several years has to borrow new money to pay interest or sell assets. Why heavily indebted industries are at a disadvantage when rates rise was covered in Learn (Economics) Lesson 18. In financial statements, you confirm it with exactly this number.
Common misconceptions
- "A debt-to-equity ratio above 100% means a risky company?"
- Not so. The benchmark differs by industry. Industries that use big equipment for a long time, like power plants, finance that equipment with debt, so the average debt-to-equity ratio can exceed 300%. For banks, deposits themselves are liabilities, so they are not even comparable.
- "The less debt, the better, always?"
- Not necessarily. If interest is much cheaper than the return, moderate debt acts as leverage that raises return on equity (ROE). The issue is less the size of the debt than the ability to bear the interest and the timing of repayment.
- "A high current ratio means lots of cash?"
- No. If most current assets are unsold inventory or uncollected trade receivables, the current ratio can be high while actual cash is short. That is why you need to look at the quick ratio together with the growth rate of receivables and inventories from Lesson 7.
Quick checkTwo companies have the same debt-to-equity ratio, but most of Company A's liabilities are trade payables and advances received, while most of Company B's are borrowings. Which one is more worrying when rates rise?
STEP 3Side by side with the industry average
With ratios, 'compared with whom' matters more than 'how much'. Let's look at industry averages from Bank of Korea statistics.
Every year the Bank of Korea collects the financial statements of externally audited non-financial for-profit corporations and publishes its “Financial Statement Analysis.” In the preliminary 2025 results released in June 2026, the debt-to-equity ratio for all industries was 98.3% and borrowings to total assets was 27.3%. Once you split by industry, though, the numbers diverge sharply. Click the bars below to see the differences by industry.
Source: Bank of Korea “2025 Financial Statement Analysis (preliminary)” (published 2026-06-10), externally audited companies at end of 2025. The finance and insurance industry is excluded from the survey. Robin Bakery and Dark Cloud Electronics (hatched bars) are fictional companies in this course.
The average debt-to-equity ratio for manufacturing is 68.8%, but within it, electronics, video and telecom equipment is 47.1% and shipbuilding and other transport is 174.3%. Shipbuilding comes out high because advances received before a ship is fully built are booked as liabilities. It is a classic example of the 'liabilities that grow the better business gets' you saw in Lesson 8. Electricity and gas is the highest at 315.7%, because it is an industry that finances decades-long equipment such as power plants and pipelines with debt and pays it back slowly through utility rates.
Banks are left out of this statistic altogether, because deposits are a bank's liabilities. For example, if equity is 8 out of 100 in assets and the rest is liabilities such as deposits, the debt-to-equity ratio is 92 ÷ 8 = 1,150% (hypothetical calculation). That is why banks are measured with other rulers, such as the capital ratios set by regulators, instead of the debt-to-equity ratio.
A sturdy company and a risky company, side by side
Now let's measure two fictional companies with the same rulers. Dark Cloud Electronics, introduced in Lesson 1, is a profitable company whose cash keeps draining away.
Robin Bakery (fictional)
Debt-to-equity ratio67%
Current ratio150%
Quick ratio105%
Borrowings to total assets21%
Interest coverage ratio15x
Dark Cloud Electronics (fictional)
Debt-to-equity ratio400%
Current ratio93%
Quick ratio57%
Borrowings to total assets42%
Interest coverage ratio1.6x
Dark Cloud Electronics (fictional, the same company as the third-year numbers in Lesson 7): assets KRW 25 billion (current KRW 14 billion = cash 0.5 + trade receivables 7.5 + inventories 5.5 + other 0.5, non-current KRW 11 billion), current liabilities KRW 15 billion (including short-term borrowings of 7), non-current liabilities KRW 5 billion (including long-term borrowings and convertible bonds of 3.5), equity KRW 5 billion, operating profit KRW 800 million, interest expense KRW 500 million.
Dark Cloud Electronics' debt-to-equity ratio is more than eight times the average of the same electronics industry (47.1%), and its current ratio is below 100%, so debt due within a year exceeds the money coming in soon. Most of its current assets are trade receivables and inventories, so its quick ratio is even lower. An interest coverage ratio of 1.6x can drop below 1x with just a small rise in rates. From this you can also guess why it issues convertible bonds so often, which is covered in Part 6.
Find it yourself on DART
To calculate the ratios of a real company, go to the annual report you opened in Lesson 3: III. Financial Matters → 2-1. Consolidated balance sheet. 1 Open the consolidated balance sheet in the table of contents, 2 check the unit above the table first (KRW millions or thousands), and 3 find and note four lines: current assets, current liabilities, total liabilities and total equity. Inventories, short- and long-term borrowings, and bonds each have their own line, so note those too and you can compute all five ratios. Find interest expense in the finance costs of the income statement or in the notes. You can check industry averages in the Bank of Korea Economic Statistics System (ECOS) under Financial Statement Analysis.
How to use it in investing
| Signal you see | What to suspect first | Where to look together |
|---|---|---|
| Debt-to-equity ratio at least 2x the industry average | Whether it is a structure propped up by debt | Borrowings to total assets, liability breakdown in Lesson 8 |
| Current ratio below 100% | Whether there is enough money for the next year | Cash holdings, short-term borrowing maturities |
| High current ratio but low quick ratio | Whether inventory is piling up | Inventory growth vs revenue growth in Lesson 7 |
| Interest coverage below 1x for 2–3 years | Whether interest is being paid with debt | Part 4 cash flow statement, Part 6 financing disclosures |
| Ratios worsening in one direction for several years | Whether it is more than a temporary problem | III-1 Summary financial information, 3-year comparison |
Not always. When debt rises temporarily for growth, such as a factory expansion, the ratios also get worse. Check the 'reason' the numbers got worse in IV. Management Discussion and Analysis, which you saw in Lesson 5. These ratios are not a criterion for picking companies; they are signals that tell you where to look in more detail.
Quick checkA construction company has a debt-to-equity ratio of 95%. Is this company on the more indebted side compared with its industry average?
✓What we learned today
- Debt-to-equity ratio = liabilities ÷ equity (Robin Bakery 40 ÷ 60 ≈ 67%) shows the size of debt, and current ratio = current assets ÷ current liabilities (150%) shows the ability to pay within a year.
- The quick ratio recalculates with current assets minus inventories (105%) to prepare for the case where inventory does not sell. Borrowings to total assets is the share of assets that is interest-paying debt (21%).
- Interest coverage ratio = operating profit ÷ interest expense shows how many times the core business can pay the interest. Below 1x, the company cannot even pay the interest from its operating profit.
- The benchmark differs by industry. In 2025 the average debt-to-equity ratio of externally audited companies differs greatly: 68.8% for manufacturing and 315.7% for electricity and gas (Bank of Korea). Banks are structurally far higher because deposits are liabilities.
- More than a single year's number, the gap from the same industry's average and which direction it has been moving for several years tell you more.
In the next lesson, we talk about how the balance sheets we have seen so far were actually 'consolidated' balance sheets. How do consolidated statements, which add up subsidiaries, differ from separate statements, which look at the company alone?
Quiz5-question quiz
Pick an answer and it's graded right away with an explanation.
Q1. Robin Bakery has liabilities of KRW 4 billion and equity of KRW 6 billion. About what is the debt-to-equity ratio?
The debt-to-equity ratio is liabilities ÷ equity. 40 ÷ 60 ≈ 67%. Remember that you do not divide by assets (KRW 10 billion).
Q2. A company has a current ratio of 150% but a quick ratio that is much lower at 60%. What should you suspect first?
The quick ratio is calculated by subtracting inventories from current assets. A big gap between the two ratios means there is a lot of inventory, and you should check whether that inventory sells well.
Q3. Which is the correct interest coverage ratio and meaning for a company with operating profit of KRW 1.2 billion and interest expense of KRW 1.5 billion?
12 ÷ 15 = 0.8x. Below 1x means the core business doesn't earn enough to pay even the interest.
Q4. In the Bank of Korea's 2025 Financial Statement Analysis (preliminary), which industry had the highest debt-to-equity ratio?
Electricity and gas was highest at 315.7%, because it finances equipment used for decades with debt. That is why ratios should be compared with the industry average.
Q5. Of two companies with the same debt-to-equity ratio, what should you look at together to tell which is more vulnerable to rising interest rates?
Liabilities include interest-free debt too. Looking at the share of interest-bearing debt (borrowings to total assets) and the ability to bear interest (interest coverage ratio) reveals interest rate sensitivity.
NextTerms · Next lesson · Related tools
Liabilities ÷ equity. It shows how much must be repaid per KRW 100 of shareholders' equity. Averages differ greatly by industry, so compare within the same industry.
Current ratioCurrent ratioCurrent assets ÷ current liabilities. It shows how many assets that turn into cash within a year there are relative to debt due within a year.
Quick ratioQuick ratio(Current assets − inventories) ÷ current liabilities. A more conservative look at whether short-term debt can be paid even if inventory doesn't sell.
Borrowings to total assetsBorrowings to total assetsInterest-bearing borrowings and bonds ÷ total assets. The share of debt whose burden rises directly when interest rates go up.
Interest coverage ratioInterest coverage ratioOperating profit ÷ interest expense. It shows how many times the core business can pay the interest. Below 1x means it can't even pay all the interest.
Balance sheetBalance sheetA table showing what a company owns on a particular day (usually the end of the fiscal year) and the sources of the money that paid for those assets, liabilities and equity. Assets = liabilities + equity always holds.
Operating profitOperating profitProfit from the core business: revenue minus cost of sales and selling, general and administrative expenses.
Interest rateInterest rateThe price of borrowing money. When rates rise, the present value of future earnings falls, which tends to lower stock multiples.
Put what you learned to use right away
Margin Call Price Calculator→Learn (Economics) Lesson 18 · Interest rates and sectors→This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.