Lesson 3 of 6 · All lessons in this module
  1. Qualitative factors: business, industry and governance
  2. Quantitative factors: the four things to measure
  3. Calculating credit ratiosVideo lesson
  4. Interpreting ratios: trends, peers and covenants
  5. Seniority, priority of claims and recoveryVideo lesson
  6. Issuer versus issue ratings and notching

Lesson 3 of 6 · 15 min

Calculating credit ratios

Credit ratios turn the financial statements into a handful of numbers on profitability, coverage and leverage, built mostly from operating earnings and conservative cash flow measures.

In short

  • Profitability: EBIT margin = EBIT / revenue (sometimes EBITDA margin).
  • Coverage: EBIT / interest expense (or EBITDA / interest, or EBITDAR / interest + rent). Higher = less credit risk.
  • Leverage: debt / EBITDA and debt / capital (higher = more leverage); FFO / debt and RCF / net debt (higher = less leverage).
  • FFO = net income from continuing operations + D&A + deferred taxes + other non-cash items. RCF = cash flow from operations − dividends. Net debt = debt − cash and marketable securities.
  • These are non-IFRS measures; definitions vary, and debt and interest are often adjusted for leases and other off-balance-sheet obligations.

Unlock this lesson free for 7 days

Create a free account to get 7 days free: every lesson, video and flashcard, and the question bank. No card needed.

Start your 7-day free trialLog in