Interesting interview question
Hi all,
I recently had an interview for an SA position in London. One of the interview questions they asked me was along the lines of: "If you had to pick two ratios to assess a company, what would you pick?"
I picked EV/EBITDA as my choice for a fair market value ratio (assuming no weird industry specific caveats) and Current Assets/Current Liabilities as my choice for a liquidity ratio.
I'm curious as to what other people would say? Please chime in with any thoughts.
Thanks!
Ah, the classic ratios question! It's like asking a chef for their secret spice—everyone has their own preference. Based on the most helpful WSO content, your choices are solid. EV/EBITDA is indeed a widely used valuation metric that compares the value of a company, including debt and liabilities, to its actual earnings before interest, taxes, depreciation, and amortization. It's a great way to get a quick read on how a company is valued in the current market relative to its peers.
The Current Ratio, which is Current Assets divided by Current Liabilities, is a classic liquidity ratio that measures a company's ability to pay off its short-term liabilities with its short-term assets. It's a good pick because it gives you a snapshot of the company's short-term financial health.
If I were to swing from the branches and pick another pair, I might go with:
Debt to Equity Ratio (Total Debt/Equity Ratio): This is a leverage ratio that gives insight into a company's capital structure and how it finances its operations. It compares the company's total liabilities to its shareholder equity. A high ratio could indicate that a company is aggressively financing growth with debt, which could be risky if not managed properly.
Return on Equity (ROE): This is a profitability ratio that measures how effectively a company is using its equity to generate profit. It's calculated by dividing net income by shareholder's equity. It's a handy way to see how well a company is doing at turning the money it has into profits.
Remember, the best ratios to use can depend on the industry the company operates in and the specific context of the company's financial situation. Keep that in mind, and you'll be swinging through financial statements like a pro!
Sources: 20 balance sheet ratios every investor should be aware of, Basic Guide Ramping Up On A Company With Public Information Part Three
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