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

Date 28 May 2025
Written By
Credit Rating Agencies Employ Multifaceted Financial Assessment to Determine Corporate Creditworthiness and Risk Profiles
Credit rating agencies in India utilize comprehensive financial analysis to assess corporate creditworthiness. They evaluate multiple financial ratios across liquidity, leverage, profitability, operating efficiency, coverage, and cash flow dimensions. Beyond quantitative metrics, agencies also consider qualitative factors like management quality, industry risk, regulatory environment, and corporate governance to provide holistic credit ratings for businesses. - (AI Summary)

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:

  1. Debt-to-Equity Ratio = Total Debt / Shareholders’ Equity
  2. Interest Coverage Ratio = EBIT / Interest Expense
  3. Debt Service Coverage Ratio (DSCR) = (Net Operating Income) / (Total Debt Service)

🔹 Profitability Ratios

To assess the efficiency of operations and earning capacity:

  1. Net Profit Margin = Net Profit / Revenue
  2. Return on Capital Employed (ROCE) = EBIT / Capital Employed
  3. Return on Net Worth (RONW) = Net Income / Shareholders’ Equity
  4. EBITDA Margin = EBITDA / Revenue

🔹 Operating Efficiency Ratios

To evaluate how efficiently a company uses its resources:

  1. Asset Turnover Ratio = Revenue / Total Assets
  2. Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
  3. Receivables Turnover Ratio = Revenue / Average Accounts Receivable

🔹 Coverage Ratios

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

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

🔹 Cash Flow Ratios

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

  1. Operating Cash Flow to Total Debt = CFO / Total Debt
  2. 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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