TaxTMI 
TaxTMI 
TaxTMI 
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:
- Current Ratio = Current Assets / Current Liabilities
- Quick Ratio = (Current Assets - Inventory) / Current Liabilities
- Cash Ratio = Cash & Cash Equivalents / Current Liabilities
🔹 Leverage (Solvency) Ratios
Used to evaluate long-term solvency and debt servicing ability:
- Debt-to-Equity Ratio = Total Debt / Shareholders’ Equity
- Interest Coverage Ratio = EBIT / Interest Expense
- Debt Service Coverage Ratio (DSCR) = (Net Operating Income) / (Total Debt Service)
🔹 Profitability Ratios
To assess the efficiency of operations and earning capacity:
- Net Profit Margin = Net Profit / Revenue
- Return on Capital Employed (ROCE) = EBIT / Capital Employed
- Return on Net Worth (RONW) = Net Income / Shareholders’ Equity
- EBITDA Margin = EBITDA / Revenue
🔹 Operating Efficiency Ratios
To evaluate how efficiently a company uses its resources:
- Asset Turnover Ratio = Revenue / Total Assets
- Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
- Receivables Turnover Ratio = Revenue / Average Accounts Receivable
🔹 Coverage Ratios
To measure how well the company can meet its debt obligations:
- Fixed Charges Coverage Ratio = (EBIT + Fixed Charges) / (Fixed Charges + Interest)
- Cash Flow Coverage Ratio = Operating Cash Flow / Total Debt Service
🔹 Cash Flow Ratios
Evaluated especially for infrastructure, manufacturing, or capital-intensive firms:
- Operating Cash Flow to Total Debt = CFO / Total Debt
- 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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