Credit analysis is the process of reviewing a borrower’s financial records to evaluate their long-term ability to repay debt.

Essential Credit Evaluation Ratios

  1. Debt Service Coverage Ratio (DSCR) = Net Operating Income ÷ Total Debt Service Obligations

Used in commercial lending; a ratio below 1.25 flags a potential cash crunch.

  1. Debt-to-Income Ratio (DTI) = Monthly Debt Payments / Gross Monthly Income

The primary metric for retail consumer mortgages, typically capped at 43% or lower.

  1. Current Ratio = Current Assets ÷ Current Liabilities

Measures short-term working capital safety; a value below 1.0 indicates liquidity risk.

  • Financial Statement Reconciliations: Auditing corporate balance sheets, profit and loss statements, and tax returns to verify revenue consistency.
  • Cash Flow Sensitivity Modeling: Testing corporate financial models against downside scenarios, such as a 20% revenue drop or a 2% interest rate spike.
  • Industry Sector Benchmarking: Comparing a corporate borrower’s profit margins and leverage ratios against industry averages to judge performance.
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