How To Use Financial Ratios In Credit Analysis

Ratio analysis helps lenders and analysts to evaluate a borrower’s operating performance (profitability and productivity) and financial condition (liquidity, leverage, solvency) in order to assess a borrower’s ability to repay its obligations. 

This program focuses on well-known and reliable ratios to assist in identifying financial trends and evaluating analytical strengths and weaknesses of borrower impacting its ability to repay.

This session will explain how to employ ratios to measure and evaluate a borrower’s performance and financial condition.  Borrower’s financial profile does change over its life cycle as it moves from new entity to mature firm, and this change over time will be explained and illustrated so that participants will see link between positive cash flows and good operating performance and financial condition.

Topics covered in this session:

• Financial Condition
  • Liquidity
    • Current and Quick Ratios to evaluate short-term liquidity
    • Working Capital Analysis, i.e., cash cycle, days receivable, days inventory, days payable
    • Fixed assets/ net worth
  • Leverage
    • Various ratios to measure the proportion of support provided by owners and creditors- i.e., debt/ worth ratio, short-term debt/ total debt, long-term debt/ total debt
  • Solvency
    • Measures for determining the ability of the firm to simultaneously satisfy the expectations of lenders and owners while maintaining the earning assets of the firm, i.e., interest coverage ratio, cash flow/ current maturities of long-term debt, sustainable growth rate
• Operating Performance
  • Profitability
    • To measure the ability of management to utilize their assets to generate sales and maximize profits, i.e., profit/ sales, profit/ equity, profit/ total assets
    • Performance ratios to measure the relationship between sales, costs and expenses and how their changes affect the bottom line
  • Repayment Ability
    • To estimate repayment ability from cash flow, i.e., global debt service coverage ratio

Learning Objectives

After attending this presentation, participants will be able to….

• Define financial condition, operating performance, and repayment ability
• Describe use of ratios in credit analysis
• Explain how credit analysis is employed to determine repayment ability
• Recognize appropriate ratio values in assessing financial condition, operating performance, and repayment ability

Who Should Attend:

Beginning Professionals in the Banking, Credit and Financial Services Industry, e.g., credit analysts; business bankers; commercial lenders; and support staffers in loan accounting, loan operations, loan documentation, loan closers