In credit analysis, how can ratios be utilized?

In credit analysis, ratios play a crucial role in assessing a borrower's ability to meet debt obligations. Ratios such as the debt-to-equity ratio, interest coverage ratio, and quick ratio provide insight into the financial health of a borrower. For example, the interest coverage ratio indicates how easily a borrower can pay interest on outstanding debt, effectively showing the relationship between earnings before interest and taxes (EBIT) and interest expenses. A higher ratio suggests a greater ability to cover interest payments, which is a key concern for lenders when evaluating credit risk.

Furthermore, other relevant ratios can illustrate liquidity and leverage, helping analysts determine whether the borrower has sufficient resources to handle current and future debt obligations. In the context of credit analysis, these quantitative measures provide a systematic approach to evaluate the financial position and risks associated with a potential borrower, which is essential for making informed lending decisions.