Liquidity, Leverage and Interest Coverage

Current ratio

Current assets ÷ current liabilities — can near-term obligations be covered by near-term resources?

Across five years: 3.66, 3.87, 4.09, 4.43, 4.79. Comfortably above 1.0 throughout, and climbing every year. On the surface, reassuring.

Quick ratio, the stricter test

The quick ratio excludes inventory, because stock has to be sold before it becomes cash and that is not guaranteed.

Same five years: 2.81 climbing to 3.87 — lower than the current ratio at every point, as it must be, and following the same rising pattern. Short-term liquidity looks strong even on the stricter measure.

When a high ratio is its own question

A healthy current ratio is often cited as roughly 1.5 to 2. This one climbs from 3.66 to 4.79. What else might that indicate, beyond “very safe”?

That the business may be holding more cash than it productively needs — capital sitting idle rather than being reinvested, returned to shareholders, or funding growth. Cash here more than doubled over five years, from ₹80.95 crore to ₹175.10 crore.

A strong balance sheet is good. An increasingly idle one is a fair question for a shareholder to ask, and “higher is better” stops being true at some point on this ratio.

Net debt, and what negative means

Net debt = total debt − cash.

The series: ₹89.05 crore, ₹64.64 crore, ₹34.98 crore, then −₹0.19 crore and −₹45.10 crore.

Negative net debt means the company holds more cash than debt — a net cash position. That transformation is also the real driver behind the rising current ratio flagged above; the two observations are the same fact seen from different angles.

Two leverage ratios telling one story

• —Net debt / EBITDA: 1.24× → 0.79 → 0.38 → essentially zero → negative. Net cash now exceeds a full year of EBITDA.
• —Debt / equity: 1.06 falling steadily to 0.48.

Both describe the same deleveraging: a company that began the period reasonably leveraged and ended it carrying very little financial risk from debt.

Interest coverage

EBIT ÷ interest expense — how many times over operating profit covers the interest bill.

The series: 2.28×, 2.90, 3.64, 4.64, 5.87. Below roughly 2–3× is commonly flagged as a debt-service warning zone; this starts adequately covered and ends comfortably so.

Two forces drive the improvement at once: EBIT growing, and the interest bill itself shrinking as debt is repaid. A ratio improving from both numerator and denominator moves faster than either change alone would suggest.

Common mistakes

• —Reading a very high current ratio as unambiguously good.
• —Using gross debt where net debt is the more informative figure, or the reverse.
• —Comparing leverage ratios across industries with structurally different capital needs.
• —Treating a single year’s ratio as a verdict rather than reading the trend.
• —Checking liquidity and ignoring debt service, or the other way round.