Gauging safety with debt and liquidity ratios

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).

Debt-to-equity ratio: other people's money vs yours

The debt-to-equity ratio 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 current ratio 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 quick ratio. (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'

Borrowings to total assets 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.

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.

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 interest coverage ratio 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.

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.

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.

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

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.