The times interest earned, or the interest coverage ratio, measures the margin safety for a corporation's bondholders. This ratio measures the firm’s ability to pay its annual fixed interest charges from its ongoing business operations. There are no set rules determining an acceptable number of times earnings should cover interest. A bondholder should investigate the long-term trend of this ratio since it is a better indication of the firms continuing ability through good times and bad times to meet its interest obligations. As a rule of thumb, the more volatile a company's earnings, the higher the times interest earned ratio should be.

Liquidity

Current

The current ratio measures the business’s ability to meet its current obligations (due within the next 12 months) with its current assets. This ratio should be similar to the industry average. For many businesses, an acceptable level of coverage is on the order of 2:1. If the ratio is too low it can indicate possible solvency problems. Excessive investment in current assets, on the other hand, can indicate an ineffective use of the firm’s short-term resources. A high current ratio can indicate uncollected accounts receivable, too much inventory, or it can indicate that management is stockpiling cash.

Acid-Test (Quick)

The acid test or quick ratio is used to determine the business's ability to pay its current liabilities using only the most highly liquid of its current assets. This ratio is a more stringent measure of a firm’s liquidity since it ignores the value of the firm’s inventory. A ratio of 1:1 is considered desirable, but no single standard exists.