We come across many peoples in our lives who will advise us to invest maybe in Reliance, TCS , Infosys and many more companies[To be precise they will brag about investing in blah blah company]. Honestly speaking market is very uncertain. You don’t know whether the company they are advising to invest will survive after 1 year or maybe after 10 years.Take a example of DHFL company. Who knew a company of this reputation will dissolve like a insolvent company in coming years. But there is a fundamental parameter which may save you from investing into a company leading to bankruptcy. Lets take a look on those parameters.
Interest Cover Ratio
A interest cover ratio of a company will actually tell you how much times the company is making money over its debt. Lets take a example
You can see the interest cover ratio of Tata chemical company is 12.22.,which means Tata chemical makes 12 times of money over the debt taken by the company.
If Tata chemical has taken a Debt of Rs 100 then it is making Rs 1200 over it!!
So it actually means they can easily pay their debts 12 times over it, but you may have question now ? what about the short term loans !! [This interest cover ratio is on YoY[Year on Year basis]. What about the loans taken for some months or the company has to pay short term borrowings taken by it
Quick Ratio tells us how much assets the company [maybe cash] has to pay over its short term borrowings or short term loans taken by it. Usually to be safe it should be more than 1.
If you take a look at quick ratio of Tata chemical it is around 2 which means it has 2 times the money it has taken for the debt. So it can be considered “safe” to invest in.
By these two parameters you will know a long term view as well as a short term view how well the company is performing so that it may pay the debt over the coming years.
In the next blog I will be telling you about cash cycle and asset turnover which are very important aspect of a company!