Vinu: Manu, there are dozens of financial ratios. But in credit appraisal, which ones actually matter?

Manu: Only those that answer three core questions: liquidity, leverage, and repayment capacity. Everything else is supportive.

Vinu: Let’s start with liquidity. Which ratio do you rely on most?

Manu: The current ratio, but with caution. A ratio of 1.33 may look acceptable, but I check what forms current assets. Debtors and inventory quality matter more than the ratio itself.

Vinu: Do you also look at the quick ratio?

Manu: Yes, especially for trading and service firms. If quick ratio is below 0.75, it signals overdependence on inventory for meeting obligations.

Vinu: Moving to leverage, what is your first check?

Manu: Debt–equity ratio. For SMEs, anything above 2:1 raises concern. High leverage means limited ability to absorb shocks.

Vinu: Many firms show good net worth but still feel risky. Why?

Manu:  Because net worth may be inflated by revaluation reserves or unsecured loans from promoters. I focus on tangible net worth, not total net worth.

Vinu: Which ratio tells you about repayment strength?

Manu: DSCR (Debt Service Coverage Ratio). If DSCR is below 1.25, repayment comfort is weak. Cash accruals must clearly cover EMIs.

Vinu: What about profitability ratios like net profit margin?

Manu: They are secondary. A net margin of 8% is fine, but meaningless if working capital is stretched and cash flows are negative.

Vinu: Are turnover ratios important?

Manu: Very much. Debtors turnover and inventory turnover reveal how efficiently cash is cycled. Slow turnover is often the real reason behind defaults.

Vinu: So should bankers calculate every ratio in the book?

Manu: No. Focus on a small set, understand them deeply, and link them to cash flow and account conduct.

Vinu: One final takeaway?

Manu: Ratios don’t cause risk—business behaviour does. Ratios only help bankers detect that behaviour early.

Vinu: That clarifies it well. Quality over quantity in ratio analysis.

Manu: Exactly. That’s how effective credit assessment is done.

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