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Compare a business borrower's liquidity, leverage and debt-service capacity across reporting periods. Build a consistent workbook, reconcile its inputs and explain why stable headline ratios can hide weaker repayment capacity.
Credit ratio analysis compares a business borrower's liquidity, leverage and debt-service capacity on a consistent reporting basis. Start with the financial workbook and debt schedule, reconcile their inputs, then explain the measures together. A stable current ratio can sit beside a shrinking cash cushion for scheduled payments.
Identify the legal entity, consolidated group and fiscal period under review. Keep the borrower separate from a guarantor unless the approved review specifically includes both, and document intercompany balances. This method concerns business borrowing; it does not produce a consumer score or a lending decision.
Request comparative balance sheets, income statements, a cash flow workbook, receivables aging, inventory detail and a debt schedule. The schedule needs lender, outstanding principal, interest expense, scheduled repayments and maturity date. Include contingent obligations in the review even when they do not sit inside a particular ratio.
The OCC's Commercial Loans handbook calls for analysis of current and preceding financial statements, commitments, contingent liabilities and repayment sources. Ratios organize that evidence; their values do not replace it.
Use definitions from the credit agreement for covenant testing. The following management review uses explicitly stated definitions so the reader can reproduce the comparison. The broader financial ratios guide explains the general measures; here the task is evaluating their combined movement for one borrower.
This illustrative US distributor supplies two completed fiscal years. All amounts are USD. Column A holds the input name, B holds 2024 and C holds 2025; the first column below identifies worksheet row numbers rather than another data field.
| Row | A: Input | B: 2024 (USD) | C: 2025 (USD) |
|---|---|---|---|
| 2 | Cash available to the business | 300,000 | 200,000 |
| 3 | Net trade receivables | 1,200,000 | 1,700,000 |
| 4 | Inventory | 1,000,000 | 1,100,000 |
| 5 | Current assets: rows 2 + 3 + 4 | 2,500,000 | 3,000,000 |
| 6 | Current liabilities | 1,250,000 | 1,500,000 |
| 7 | Interest-bearing debt | 3,000,000 | 3,300,000 |
| 8 | EBITDA | 1,000,000 | 1,100,000 |
| 9 | EBIT | 800,000 | 850,000 |
| 10 | Interest expense and cash interest | 200,000 | 250,000 |
| 11 | Scheduled principal payments | 400,000 | 500,000 |
| 12 | Cash taxes | 100,000 | 120,000 |
| 13 | Maintenance capital expenditures | 100,000 | 130,000 |
| 14 | Increase in operating working capital | 50,000 | 100,000 |
| 15 | Total assets | 6,000,000 | 6,800,000 |
| 16 | Total liabilities | 3,500,000 | 4,000,000 |
| 17 | Equity | 2,500,000 | 2,800,000 |
In this example there are no other current assets, and restricted cash is excluded. Interest expense equals cash interest. In a real workbook, bridge any differences rather than silently using one in place of the other.
Tie receivables to aging and inventory to its valuation report. Check the balance sheet with =B15-B16-B17, then copy across to column C: both results must be zero. The SEC's financial statement guide explains the assets-equal-liabilities-plus-equity identity and why balance sheet snapshots differ from period cash flows.
Use these exact spreadsheet formulas, then copy the B references across to C. Display ratios to two decimal places while retaining full precision in calculations.
| Measure | Formula for 2024 | 2024 | 2025 |
|---|---|---|---|
| Current ratio | =B5/B6 |
2.00x | 2.00x |
| Quick ratio, cash plus net trade AR | =(B2+B3)/B6 |
1.20x | 1.27x |
| Gross debt / EBITDA | =B7/B8 |
3.00x | 3.00x |
| EBIT / interest expense | =B9/B10 |
4.00x | 3.40x |
The first three readings look stable or slightly better. Yet more of the liquidity sits in receivables while cash falls. The credit reviewer should inspect aging, disputes and customer concentrations before calling that quick-ratio improvement a stronger repayment position.
Interest coverage also weakened despite higher operating earnings. That deserves a debt-schedule explanation: rate changes, average balances, new facilities or a different mix of borrowing. Do not infer the cause from the ratio alone.
For a services borrower, financial ratios for service companies explains the operating context without assuming a distributor's inventory cycle applies. Borrower performance ratios also differ from the institution-level measures in credit union ratios.
For this review, define cash available for debt service as EBITDA minus cash taxes, maintenance capital expenditures and the increase in operating working capital. Debt service means cash interest plus scheduled principal for the same year. This is a review definition; use the agreement's adjustments when testing an actual covenant.
Debt-service coverage = Cash available for debt service / Scheduled cash interest and principal
| Bridge | 2024 (USD except coverage) | 2025 (USD except coverage) |
|---|---|---|
| EBITDA | 1,000,000 | 1,100,000 |
| Less cash taxes | -100,000 | -120,000 |
| Less maintenance capital expenditures | -100,000 | -130,000 |
| Less working capital increase | -50,000 | -100,000 |
| Cash available for debt service | 750,000 | 750,000 |
| Cash interest | 200,000 | 250,000 |
| Scheduled principal | 400,000 | 500,000 |
| Total debt service | 600,000 | 750,000 |
| Debt-service coverage | 1.25x | 1.00x |
The formulas using the original input table are:
Cash available = B8-B12-B13-B14
Debt service = B10+B11
Coverage = (B8-B12-B13-B14)/(B10+B11)
Cash available is unchanged, while scheduled payments rise. Coverage therefore reaches the point where the defined cash measure exactly matches debt service. Trace the bridge to the cash flow workbook and confirm principal against the loan schedule; the balance sheet's current debt balance is not automatically the year's repayments.
Hold all 2025 inputs unchanged except EBITDA. Apply an illustrative 10% reduction to test the earnings risk:
| Stress input or result | 2025 base (USD except ratios) | Downside (USD except ratios) |
|---|---|---|
| EBITDA reduction assumption | 0% | 10% |
| EBITDA: base × (1 - reduction) | 1,100,000 | 990,000 |
| Less cash taxes | -120,000 | -120,000 |
| Less maintenance capital expenditures | -130,000 | -130,000 |
| Less working capital increase | -100,000 | -100,000 |
| Cash available for debt service | 750,000 | 640,000 |
| Cash interest plus scheduled principal | 750,000 | 750,000 |
| Coverage: cash available / debt service | 1.00x | 0.85x |
The downside produces $640,000 / $750,000 = 0.85x coverage, rounded. This sensitivity is not a forecast.
Record which assumption changed and obtain operating support for a realistic downside. If collections are the concern instead, change the working capital input and investigate credit limit headroom in the borrower's own customer book.
Upload a sample of your own prepared borrower workbook and debt schedule: Covirage maps the columns, its tools compute and check the figures, and the external AI model explains them with every figure traced to its rows. Create a free Covirage account and bring the inputs behind your next review.
See Covirage for commercial banking for the supporting industry context.
Start with liquidity, leverage and coverage measures that match the business and the loan agreement. A current ratio shows short-term balance sheet coverage, while debt-service coverage connects cash available with scheduled principal and interest. Review the underlying asset quality and repayment timing alongside the ratios.
No. EBITDA excludes interest, taxes, depreciation and amortization, but it does not account for working capital investment or capital spending. A documented cash bridge should deduct the cash uses relevant to the chosen coverage definition before comparing the result with debt payments.
Ratios provide evidence for a professional review, rather than a complete lending decision or automated credit score. The reviewer also needs reliable financial information, repayment sources, collateral and contingent obligations, plus the lender's policies and the specific agreement terms.