What You Should Do

By Tom Steinert-Threlkeld  |  Posted 2003-02-14 Print this article Print

EDS supposedly faced a cash crunch. Now the SEC is investigating. But was it really the case?

What Should You Do: Calculate Financial Ratios

Current Ratio
Tells you a company's ability to pay its bills. Use balance sheet. Divide "current assets" by "current liabilities.'' Result should be greater than one.

Quick Ratio
The acid test. Also on balance sheet. Eliminate inventory from "current assets." Then divide by current liabilities. If still greater than one, fine.

Days Payable
Shows whether the company is paying its bills on time. Divide accounts payable by 365. Number of days that result should not be increasing.

Days of Inventory on Hand
Shows whether the company is having trouble selling its hardware or software. Divide inventory by 365. Should not be increasing.

Debt to Equity Ratio
Shows how heavily indebted a company is. Divide long-term debt (don't count amounts due this year) by shareholders' equity. If result is greater than 50%, it's a red flag.

SOURCES: American Express, Baseline Research

Tom was editor-in-chief of Interactive Week, from 1995 to 2000, leading a team that created the Internet industry's first newspaper and won numerous awards for the publication. He also has been an award-winning technology journalist for the Dallas Morning News and Fort Worth Star-Telegram. He is a graduate of the Harvard Business School and the University of Missouri School of Journalism.

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