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.
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