Liquidity is used to
assess whether a company can repay its loan in short period. If company cant
pay out its loan in time, it will face big problems ( borrow loans with high
interest or sell assets to repay its loan).
To be safe, cash
ratio should be more than one. Current ratio should be more than 2. for a
constant profitable company.
There are two
different opinions when considering using high debt ratio. Aggressive investors
prefer high debt because high debt means high leverage which in turn means high
growth of revenue and profit in the future. However, high debt ratio also means
high danger because higher interest expense need to be paid for debt (fixed
cost).
My advise is, if you
are going to investigate the company thoroughly, then you can choose company
with high debt ratio. Because it needs better understanding of company itself
and the whole industry in order to predict the successfulness of the company using
debt.
If you are not going
to do so, better play safe and choose the company with low debt ratio.
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