Financial Ratios - 5C's of Credit

What do coverage ratios measure?

A company's ability to meet its debt financing obligations.

What is the formula for the Debt Service Coverage Ratio (DSCR)?

Operating Profit / (Interest + Principal Repayments)

What does a higher Debt Service Coverage Ratio indicate?

Better ability to cover debt obligations.

What does a low Debt Service Coverage Ratio suggest about a company

The company may struggle to meet its debt payments.

What do leverage ratios assess?

The extent to which a company is financed by debt vs. equity.

What is the formula for the Debt to Equity Ratio?

Total Liabilities / Total Shareholder’s Equity

Is a high or low Debt to Equity Ratio better?

Lower is better – it implies stronger solvency.

What is the formula for the Debt to Assets Ratio?

Total Liabilities / Total Assets

What does the Debt to Assets Ratio show?

The proportion of company assets financed by debt.

What is the formula for Funded Debt to EBITDA?

Interest-Bearing Debt / EBITDA

What does Funded Debt to EBITDA measure?

The number of years of EBITDA needed to pay off funded debt.

What is the formula for Funded Debt to Equity?

Interest-Bearing Debt / Total Shareholder’s Equity

What do profitability ratios evaluate?

A company’s ability to generate earnings.

What is the formula for the Gross Margin Ratio?

Gross Profit / Revenues

What is the formula for the Operating Margin Ratio?

Operating Income (EBIT) / Revenues

What is the formula for the Net Profit Margin Ratio?

Net Income / Revenues

What does a higher gross margin indicate?

The company retains more revenue after direct costs.

What does a high operating margin suggest?

Strong operational efficiency.

What does a high net profit margin tell us?

The company is effectively converting sales into profit.

What do efficiency ratios measure?

How effectively a company uses its assets.

What is the formula for the Asset Turnover Ratio?

Revenues / Total Assets

What is the formula for the Inventory Turnover Ratio?

Cost of Goods Sold / Average Inventory

What does the inventory turnover ratio indicate?

How quickly inventory is sold and replaced.

What is the formula for Receivables Turnover Ratio?

Revenues / Average Accounts Receivable

What does a high receivables turnover indicate?

Efficient collection of customer payments.

What do liquidity ratios assess?

A company's ability to meet short-term obligations.

What is the formula for the Current Ratio?

Current Assets / Current Liabilities

What does a current ratio >1 indicate?

The company has more assets than liabilities in the short term.

What does trend analysis involve in credit analysis?

Examining how key ratios change over time to spot patterns or risks.

Why are financial ratios important in credit analysis?

They quantify a company's financial health and help predict its ability to repay debt.