1. Liquidity Ratios
Purpose: Assess the borrower's ability to meet short-term financial obligations.
Common Ratios:
Current Ratio: Current assets / Current liabilities
Quick Ratio: (Current assets - Inventory) / Current liabilities
Cash Ratio: Cash and cash equivalents / Current liabilities
2. Leverage Ratios
Purpose: Measure the extent to which a company is financed by debt and its ability to handle its debt obligations.
Common Ratios:
Debt-to-Equity Ratio: Total debt / Total equity
Debt-to-Assets Ratio: Total debt / Total assets
Times-Interest-Earned (TIE) Ratio: Earnings before interest and taxes (EBIT) / Interest expense
3. Profitability Ratios
Purpose: Evaluate a company's ability to generate profits, which ultimately support its debt repayment.
Common Ratios:
Gross Profit Margin: (Revenue - Cost of goods sold) / Revenue
Operating Profit Margin: Earnings before interest and taxes (EBIT) / Revenue
Net Profit Margin: Net income / Revenue
Return on Assets (ROA): Net income / Total assets
Return on Equity (ROE): Net income / Total equity
4. Coverage Ratios
Purpose: Directly assess a company's ability to meet its interest and debt obligations.
Common Ratios:
Interest Coverage Ratio: Earnings before interest and taxes (EBIT) / Interest expense
Debt Service Coverage Ratio (DSCR): Net operating income / Total debt service (principal + interest payments)
5. Activity or Efficiency Ratios
Purpose: Measure how effectively a company manages its assets to generate revenue.
Common Ratios:
Inventory Turnover: Cost of goods sold / Average inventory
Days Sales Outstanding (DSO): Average accounts receivable / (Annual revenue / 365 days)
Fixed Asset Turnover: Revenue / Net fixed assets