Business ratio being used by India Credit Rating Agencies for providing credit ratings.

[YAGAY andSUN]

Credit rating agencies in India, such as CRISIL, ICRA, CARE Ratings, and India Ratings & Research, use a combination of quantitative and qualitative factors to assign credit ratings. One of the core aspects of their analysis includes financial ratios — key indicators of a company's financial health, performance, and creditworthiness.

Here are the common financial ratios used by Indian credit rating agencies:

🔹 Liquidity Ratios

These assess a company's ability to meet short-term obligations:

1. Current Ratio = Current Assets / Current Liabilities
2. Quick Ratio = (Current Assets - Inventory) / Current Liabilities
3. Cash Ratio = Cash & Cash Equivalents / Current Liabilities

🔹 Leverage (Solvency) Ratios

Used to evaluate long-term solvency and debt servicing ability:

4. Debt-to-Equity Ratio = Total Debt / Shareholders’ Equity
5. Interest Coverage Ratio = EBIT / Interest Expense
6. Debt Service Coverage Ratio (DSCR) = (Net Operating Income) / (Total Debt Service)

🔹 Profitability Ratios

To assess the efficiency of operations and earning capacity:

7. Net Profit Margin = Net Profit / Revenue
8. Return on Capital Employed (ROCE) = EBIT / Capital Employed
9. Return on Net Worth (RONW) = Net Income / Shareholders’ Equity
10. EBITDA Margin = EBITDA / Revenue

🔹 Operating Efficiency Ratios

To evaluate how efficiently a company uses its resources:

11. Asset Turnover Ratio = Revenue / Total Assets
12. Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
13. Receivables Turnover Ratio = Revenue / Average Accounts Receivable

🔹 Coverage Ratios

To measure how well the company can meet its debt obligations:

14. Fixed Charges Coverage Ratio = (EBIT + Fixed Charges) / (Fixed Charges + Interest)
15. Cash Flow Coverage Ratio = Operating Cash Flow / Total Debt Service

🔹 Cash Flow Ratios

Evaluated especially for infrastructure, manufacturing, or capital-intensive firms:

16. Operating Cash Flow to Total Debt = CFO / Total Debt
17. Free Cash Flow = CFO - Capital Expenditure

Qualitative Factors Also Considered:

• Management quality
• Industry risk
• Regulatory environment
• Business model and competitive position
• Corporate governance standards
• Legal/contractual protections (e.g., escrow mechanisms, DSRA)

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