Blog · Finance metrics and formulas · Finance and FP&A teams
Compare a business borrower's liquidity, leverage and debt-service coverage using consistent statements and a debt schedule. Work through two reporting periods, reconcile the inputs and distinguish management measures from the loan agreement's covenant definitions.
Ratios for bank loan reviews measure a business borrower's liquidity, leverage and repayment capacity together. Calculate them from the same reporting dates and clearly defined inputs, then compare the result with the actual loan agreement rather than a supposed universal lending threshold.
These are borrower measures. The separate page on bank financial ratios examines the financial institution itself.
A lender wants to understand where scheduled payments will come from and what could interrupt that source. The SBA's 7(a) overview requires creditworthiness and a reasonable ability to repay, and explains that most term-loan payments come from the business's cash flow. This principle does not make an SBA requirement a rule for every commercial loan.
Liquidity asks whether current obligations can be met. Leverage asks how much the balance sheet relies on creditors. Coverage asks whether defined cash available exceeds the payments due over the same period. A strong answer to one does not repair every weakness in the others.
For finance teams, the job is to produce a reproducible worksheet: a reviewer should be able to trace each numerator and denominator to a statement, schedule or permitted adjustment.
Use these management-review definitions for the example:
Current ratio = Current assets / Current liabilities
Quick ratio = (Cash + Net trade receivables) / Current liabilities
Liabilities-to-equity ratio = Total liabilities / Book equity
Debt-service coverage ratio = Defined cash available / Scheduled principal and cash interest
The quick ratio here excludes inventory and assumes no other quick assets. Total liabilities include more than interest-bearing borrowings, so liabilities-to-equity is not interchangeable with a debt-to-equity measure that uses funded debt only.
For this worksheet, defined cash available equals EBITDA less cash income taxes, maintenance capital expenditures and cash absorbed by operating working capital. This is an illustrative management measure, not a standard covenant definition or a replacement for the cash flow statement. EBITDA means earnings before interest, taxes, depreciation and amortization.
A US distributor prepares its 2025 and 2026 annual reviews. Use year-end balance sheets for liquidity and leverage, annual P&Ls for EBITDA, and annual cash records and debt schedules for coverage. Values are USD; displayed ratios are rounded to two decimals.
| Balance-sheet input | December 31, 2025 (USD) | December 31, 2026 (USD) |
|---|---|---|
| Cash | 300,000 | 450,000 |
| Net trade receivables | 700,000 | 750,000 |
| Inventory | 800,000 | 960,000 |
| Current assets | 1,800,000 | 2,160,000 |
| Current liabilities | 1,200,000 | 1,200,000 |
| Total liabilities | 3,000,000 | 3,300,000 |
| Book equity | 2,000,000 | 2,200,000 |
| Total assets | 5,000,000 | 5,500,000 |
The current-asset components sum to their stated totals. The balance-sheet identity also holds: $3,000,000 plus $2,000,000 equals $5,000,000, and $3,300,000 plus $2,200,000 equals $5,500,000. Current liabilities are already included in total liabilities; never add them again.
| Ratio | 2025 calculation | 2025 result | 2026 calculation | 2026 result |
|---|---|---|---|---|
| Current | 1,800,000 / 1,200,000 | 1.50x | 2,160,000 / 1,200,000 | 1.80x |
| Quick | (300,000 + 700,000) / 1,200,000 | 0.83x | (450,000 + 750,000) / 1,200,000 | 1.00x |
| Liabilities to equity | 3,000,000 / 2,000,000 | 1.50x | 3,300,000 / 2,200,000 | 1.50x |
Liquidity improves, but inventory accounts for part of the current-asset increase. Check aging, collectibility and obsolete stock before interpreting that increase as available cash. The broader working capital method explains the operating balances behind this review.
The annual schedule supplies the following figures. Deductions are shown as positive amounts, and working-capital absorption excludes cash, debt and the other deductions listed separately.
| Coverage input or step | 2025 (USD) | 2026 (USD) |
|---|---|---|
| EBITDA | 950,000 | 1,200,000 |
| Less cash income taxes | 150,000 | 180,000 |
| Less maintenance capital expenditures | 100,000 | 120,000 |
| Less operating working-capital absorption | 50,000 | 100,000 |
| Defined cash available | 650,000 | 800,000 |
| Scheduled principal | 360,000 | 380,000 |
| Cash interest | 140,000 | 120,000 |
| Scheduled debt service | 500,000 | 500,000 |
| Debt-service coverage | 1.30x | 1.60x |
The proof for 2026 is $1,200,000 minus $180,000 minus $120,000 minus $100,000 equals $800,000. Principal plus interest equals $500,000; dividing produces 1.60x. The P&L review supports the EBITDA reconciliation; use P&L analysis to investigate its underlying earnings movements.
Do not deduct interest from this numerator as well: the illustrative calculation starts before interest and includes that payment in debt service. For other definitions, document how interest, leases, distributions and permitted addbacks are treated.
Coverage improved while liabilities-to-equity stayed unchanged. That supports a conversation about stronger operating cash generation, but it does not establish credit approval. The OCC's commercial-loan handbook directs examiners to compare current and prior statements and assess whether operating cash flow supports scheduled term-loan payments.
Test a downside separately. If 2026 cash available falls by $200,000 with payments unchanged, coverage becomes $600,000 / $500,000 = 1.20x. Suppose, solely for illustration, an agreement requires 1.25x using this exact definition. Required cash is $500,000 times 1.25, or $625,000; the original $800,000 therefore has $175,000 of cushion. That hypothetical requirement is not a recommended lender threshold.
The controller owns reconciliations and consistent account mapping. Treasury owns the debt schedule, agreement definitions and testing calendar. The CFO reviews downside assumptions and discusses unresolved questions with the lender before relying on the worksheet.
Upload your financial statements, debt schedule and defined adjustment worksheet: Covirage maps the columns, and its tools compute and check the ratios. The external AI model explains the comparisons with every figure traced to its rows, while the loan agreement determines the covenant definitions. Create a free Covirage account, which takes about a minute, then set up your business and bring a sample of your own data.
See Covirage for finance teams for the supporting reporting workflow.
There is no single threshold that applies to every lender, borrower and loan. Compare the result with the specific agreement's definition and requirement. Also review the cash cushion under weaker trading conditions, because a historical ratio alone does not establish future repayment capacity.
No. Current assets may include slow-moving inventory or overdue receivables that cannot readily fund payments. A lender also considers cash generation, leverage, collateral, management and other underwriting factors. The current ratio is one part of the review, rather than an approval decision.
Follow the loan agreement's definitions and apply them consistently to both cash available and payment obligations. Some measures include specified lease payments or use a fixed-charge calculation. Adding payments to the denominator without checking their treatment in the numerator can distort coverage.
Only when that matches the agreed definition. EBITDA does not deduct cash taxes, capital spending or working-capital investment. A management repayment worksheet can show those deductions explicitly, while a separate covenant calculation follows the lender's permitted adjustments and exclusions.