Credit Analyst Interview Ratios

What are the 5 ratio categories used to assess Financial Health?

Liquidity, profitability, efficiency, leverage, and coverage

Define Liquidity

Measures a company's ability to turn its short-term assets into cash to pay off short-term liabilities

Define Profitability

Measures the company's efficiency of turning sales into profit

Define Efficiency

Measures how well a company uses its assets, inventory and resources to generate revenue and cash

Define Leverage

A Maximum covenant, measures how much debt does the company carry relative to what it has or earns

Define Coverage

A Minimum covenant, measures the companys ability to serveice debt from current earnings/cashflow

Debt to Equity (Type, definition, formula)

Leverage, measures how much of company’s funding comes from creditors vs. owners, (total debt/ total equity)

Funded Debt to EBITDA (type, definition, formula)

Leverage, how many years of current earnings would it take to payoff all funded debt. (Interest bearing debt)/EBITDA

Debt to EBITDA (type, definition, formula)

Leverage, shows how many years of current operating cashflows it takes to pay off all debt, (Total Debt / EBITDA)

Net Debt to EBITDA (type, definition, formula)

Leverage, Net ofcompany’s cash cushion against it’s debt before measuring leverage, (Total Debt - Cash)/EBITDA

Loan to Value (type, definition, formula)

Leverage, how much of hte collaterals value the bank is financing, (Loan Amount / Appraised Collateral Value)

Debt Service Coverage Ratio (type, definition, formula)

Coverage, tests how well the company is able to pay it’s entire debt service (EBITDA/(principal + interest due)

Interest Coverage Ratio (type, definition, formula)

Coverage, only tests if client can cover interest expense, (EBIT/Interest Expense)

Fixed Charge Coverate Ratio (type, definition, formula)

Coverage, measures if company’s available cash flow can cover it’s fixed expenses, (EBITDA - Fixed Charges before tax)/(Fixed charges before tax + interest)

Debt to Assets (type, definition, formula)

Leverage, what percentage of all assets is debt - financed, (Total Debt / Total Assets)

Equity Ratio (type, definition, formula)

Leverage, What percentage of the assets is funded by owners, (Total Equity / Total Assets)

Current Ratio / Working Capital ratio (type, definition, formula)

Liquidity, can the current assets cover current liabilites, (Current Assets / Current Liabilites)

Quick Ratio (type, definition, formula)

Liquidity, removes inventory from current assets to measure if current assets can cover current liabilites, (Current assets - inventory / Current Liabilities)

Net Working Capital (type, definition, formula)

Liquidity, shows the actual cash cushion left over after paying short-term debts, (Current Assets - Current Liabilities)

Gross Profit Margin (type, definition, formula)

Profitability, shows the profit left after direct production costs, ( Gross Profit Margin / Revenue)

Operating Profit Margin (EBIT Margin) (type, definition, formula)

Profitability, measures how much operating profit a company makes for every dollar of total revenue, (EBIT / Total Revenue)

Net Profit Margin (type, definition, formula)

Profitability, reveals the final percentage of revenue left as pure profit after all expenses, taxes, and interest, (Net Income / Revenue)

Return on Assets (type, definition, formula)

Profitability, measures how effectively a company uses its total assets to produce profit, (Net Income / Total Assets)

Return on Equity (type, definition, formula)

Profitability, measures how rate of return earned on the capital invested by the company's owners, (Net Income / Shareholders Equity)

Asset turnover ratio (type, definition, formula)

Efficiency, measures how efficiently a company uses it’s assets to generate net sales or revenue, (Net Sales/ average total Assets)

Inventory (type, definition, formula)

Efficiency, measures how many times a business sells and replaces its inventory over a specific period, (COGS / average inventory)

Days’ Sales in Inventory (type, definition, formula)

Efficiency, measures the average number of days a company takes to turn inventory into sales, (Average Inventory ÷ COGS) × 365

Operating Working Capital (type, definition, formula)

Liquidity, measures the money a business ties up in it’s day to day core operations, (A/R + Inventory - A/P)