A margin of safety which is applied to a company’s financial ratios. For example, the current ratio relates current assets to current liabilities and indicates a company’s ability to pays its short-term debt. A ratio of more than one is usually a normal level because anything less than one indicates that the company’s liabilities exceed its assets. A high ratio means more of a safety cushion. If this ratio has a cushion of up to 1.1 (that is assets exceed liabilities by 1.1 times) then any ratio lower than 1.1 may trigger an alarm. Likewise, if a company’s debt-to-equity ratio has a cushion of up to 30% of debt, any ratio above that level would be a source of concern for the company.
April 16, 2023
