The key financial ratios
Some terms used in the financial analysis can be hard to understand and are sometimes unknown to lenders. Below you can find a glossary of the main financial ratios used during our credit analysis.
- EBITDA (Earnings Before Interests, Taxes, Depreciations and Amortisations): it is the difference between the sales turnover and operating expenses, which enable the company to maintain its daily activity.
- Equity: the equity is the initial capital brought by the partners when they created the company. Our credit analysts compare the equity with the net debt of the company.
- FCCR (Fixed Charge Coverage Ratio): it measures the repayment capacity of a company. The higher the FCCR, the greater the safety margin. It is equal to: (operating profit – corporate tax – self-financed investments) / (financial charges + amount of annual debt maturities).
- Net debt: it represents the total external debt less cash.
- Net debt/EBITDA ratio: It expresses the number of years the company is able to repay its debt through its entire EBITDA.
- Net debt / equity ratio: it measures the level of indebtedness of a company relative to its equity. It gives information about the company's financial structure and its dependence on external fundings.
- Sales turnover: this is the income from the sales of the product or the service of the company.
How to interpret the FCCR
- FCCR < 1 : insufficient profitability to cover debt repayment charges -> project rejected
- FCCR = 1 : profitability just sufficient to cover debt repayment charges -> presentation to the Credit Committee will be considered depending on the history and management of the company and contextual elements
- FCCR > 1 : profitability sufficient to cover debt repayment charges with a safety cushion -> presentation to the Credit Committee will be considered taking into account contextual elements
Key figures are the first level of analysis of a company. To go further, we have to compare the numbers with reality and go into the detail about what the company does and who is in charge of it. In other words, our goal is to know the company thoroughly to:
- Check that the information we have is complete: has the company forgotten to mention some elements?
- Avoid fraud: has the company tried to deceive us in relation to its finances or activity?