B4 - Reading Business & Financial Information CH4 Key Lending Ratios & Taxation

Key Lending Ratios and Taxation

Current ratio formula?

Current assets ÷ Current liabilities

Quick rule for current ratio?

~2:1 desirable; <1 is risky (industry dependent)

Debt-to-equity basic formula?

Interest-bearing debt / equity

What does Debt-to-Equity >1 imply?

More debt than equity; higher leverage

Debt service coverage ratio (DSCR) formula?

EBITDA (or avail. income) / (Principal + interest)

Interest coverage basic idea?

How many times EBITDA covers interest expense

Typical minimum Debt Service Coverage Ratio lenders like?

approx. 1.25× (varies by lender/industry)

What is funded debt?

Interest-bearing obligations (current + long term)

Why include proposed debt in ratios?

To assess post-financing leverage and serviceability

Debt-to-EBITDA formula?

Interest-bearing debt ÷ EBITDA

Why use EBITDA in debt ratios?

Proxy for cashflow, normalised across capital structures

What are permanent differences for tax?

Items taxable for accounting but never for tax (or vice versa)

Do permanent differences create deferred taxes?

No — no future tax reversal, so no deferred tax

What are temporary differences?

Timing differences that reverse later (create DTA/DTL)

Example of deferred tax asset?

Warranty expense recognised now but deductible later

Example of deferred tax liability?

Straight-line accounting depreciation vs accelerated tax depreciation

Where are DTAs/DTLs shown?

On the balance sheet; movements affect tax expense

What is accounting income vs taxable income?

Accounting = financial statements; taxable = tax return basis

How is tax expense on income statement composed?

Current tax payable + change in deferred tax

What is a valuation allowance for a Deferred Tax Asset?

Reserve if future taxable profit unlikely to realise the DTA

How do dividends affect corporate tax?

Dividends are not deductible for the corporation

Why analyse deferred tax for lenders?

DTAs/DTLs affect future cash taxes and equity — impact solvency

What’s a practical lender rule on related-party loans?

Request subordination or treat as near-equity unless proven commercial

Why test ratios under higher interest rates?

To ensure debt service under stressed conditions (use test rates)

What’s the effect of shareholder distributions on leverage?

Reduce equity → increase leverage ratios

What is tangible net worth?

Equity − intangible assets

Why prefer tangible net worth in lending?

Shows asset value that can realistically secure loans

Total liabilities to tangible net worth — lender use?

Measures total claims vs realisable equity collateral

Quick tax insight for analysts?

Always adjust accounting profit to taxable basis when forecasting cash taxes

Short lending advice on ratios?

Use multiple ratios together and stress-test assumptions