Lesson 4 of 6 · 13 min
Interpreting ratios: trends, peers and covenants
A ratio means little alone: credit analysts read it against its own trend, against industry and rating peers, and against covenant thresholds to judge where credit quality is heading.
In short
- Ratios help assess financial health, spot trends over time and compare companies within and across industries.
- Falling margins, weaker coverage and rising leverage point to wider spreads and possible downgrades.
- Analysts compare current and projected ratios with rating-category benchmarks for the industry to estimate where the rating could go.
- Ratio levels for a given rating vary widely across industries, so compare like with like.
- Financial covenants set ratio limits; a deteriorating ratio can put a company in breach.
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