A high debt equity ratio is a bad sign for the safety of investment. A company which has high debt in comparison to its net worth, has to spend a large part of its profit in paying off the interest and the principal amount.

If the debt is decreasing over a period of time, it is a good sign. Vice-versa, an increasing debt is a bad sign. The companies that have a debt equity ratio greater than 0.5 should be avoided

Current Ratio = Current Assets / Current Liabilities

This ratio denotes the operating financial health of the company. It measures the capacity of the company to pay off its immediate liabilities with the immediately liquifiable assets. Current Assets include Cash, Short term investments, Receivables, Inventory etc.

A current ratio of 2 is considered ideal. Companies that have current ratio less than 1 should be avoided.

Interest Coverage Ratio = Earning Before Interest and Tax (EBIT) / Interest

A high interest coverage ratio means a high capacity to bear the interest of the debt with profit. In order to ensure safety of the investment, one should never invest in the companies that have interest coverage ratio of less than 2.5.

Operating Cash Flow = EBIT (Earnings Before Interest & Tax ) + Depreciation & Amortization – Changes in Working Capital

Operating Cashflow is the amount of cash generated by the company’s general operations. For an ideal company, the operating cash flow would normally be higher than the net income and would tend to be parallel to the net income unless in case of a huge shift in company’s strategy which you should investigate about.

A huge deviation between income and operating cash flow depicts the possibility of accounting manipulation. Operating Cashflow is a very important metric when you want to analyse about how reliable a company’s profit figures are.