BENCHMARK RATIOS

The indicative benchmarks for key Ratio General Micro & Small Medium Acceptable
financial ratios are as under: Benchmark incl. Enterprise Enterprise Level
expanded SME

Current Ratio (minimum) 1.33 1.17 1.20 1.00

D- E Ratio TTL/ ATNW (maximum) 3.00 3.00 3.00 4.50
D- E Ratio TOL/ ATNW (maximum) 4.50 4.50 4.50 5.00
FACR (min) (Tangible Asset - CL)/ Debt 1.25 1.25 1.25 1.25
Average (DSCR) (minimum) 1.75 1.75 1.75 1.20
Minimum DSCR in any year 1.25 1.00 1.25 1.00
Interest Coverage Ratio E/I 2.60 2.50 2.25 2.00
Total Debt / EBIDTA (ability to pay off debts) 5.00 6.00 5.50 6.00

• the approved product / scheme-specific guidelines will be applicable in respect of

their indicative benchmark financial ratios
• Vertical Comparison: Same year performance
Ratio Analysis
• Horizontal Comparison: Comparing figures of different years
• Ratios:
• Liquidity Ratio
• Solvency Ratio
• Efficiency Ratio: a. Financial Management Ratios
b. Material Management Ratios
c. Profitability/ Operational Ratios
• Liquidity Ratios:
• Current ratio: To asses, whether CL are meet out CA. CA/ CL. Internationally 2:1. If, CA is Low/ High, to take
care in justifying. Low Current Ratio leads to Diversion/ cash loss.
Options to improve Ratio: Explore possibility of infusion of additional funds,
Ploughing back of profits,
Stipulations for not declaring dividend,
Non withdrawal of profits,
Reduction in the level of non-current assets
Liquidation of investments outside business, if any, within a reasonable time
2
 Balance Sheet
.
Current Liabilities Current Asset

Net worth Non current asset

Intangible asset
Capital (long term) asset
Long Term Liabilities
 Liquidity Ratio
Wherever banks are financing working capital or current assets, they are
interested to evaluate whether current liabilities can be met out of
current assets. This is the test for liquidity or short term solvency.
There are two ratios for measuring liquidity.

Current Ratio Current Assets Benchmark

= 1.33:1
Current Liabilities

Acid/ Quick ratio CA – Inventory Benchmark

= 1:1
CL – bank Borrowing
 Solvency & Financial Ratios
These ratios indicate the efficiency of financial management of the concern.
The financial position/financing pattern of a concern is measured by the
following ratios :
Solvency Ratio Net Tangible Assets More than 1
TOL
Debt-Equity Ratio Total Outside Liabilities Benchmark= 4.5:1
(TOL/ATNW) =
A Tangible Net Worth
Debt-Equity Ratio Total Term Liabilities Bench mark = 3
(TTL/ATNW)
A Tangible Net Worth
Fixed Asset Coverage Net Fixed Assets Bench mark = 1.25
Ratio=
Long term and/or Medium term Liability
 Material Management Ratios
These ratios indicate the efficiency of financial management of the
concern. The financial position/financing pattern of a concern is measured
by the following ratios :
Stock Velocity Ratio Average Stock x 365 The less the better
(No of days) =
Cost of Sales

Debtors Velocity Ratio (No of Avg Debtors x 365 The less the better. Int
days) = saved on WC, lending his money – Price to fix
accordingly. Affects sales. 1 to 3 months
Credit Sales

Creditors Velocity Ratio (No of Avg Creditors x 365 The less the better.
days) = Retaining creditor, to avail large credit period.
15 days to 60 days
Credit Purchases
 Material Management Ratios

Cost of Production = RM consumed + Power n Fuel + Spares consumed + Overhead exp +

Other Mfg Exp + Depreciation + Opening SIP – Closing SIP (all direct expenses)

Cost of Goods sold = Cost of Production + Opening FG – Closing FG +

Purchases of FG

Cost of Sales = Cost of Goods Sold + Selling Expense + Distribution Expenses +

Admin Expenses
 Operational Efficiency Ratios
FA Turnover Sales The higher the better
Ratio Net Fixed Assets

Capital Sales The use of capital to sales.

Turnover Ratio The higher the better.
Capital Employed
(Total liabilities – Funds invested outside business)

RM Holding Avg Raw Material x 12 No of days RM are with Firm

H –Ve. WC interest, Price of RM, Type of
Raw Material Consumed RM, availability of RM

SIP Holding Avg Stock in Process x 12 No of days for RM in SIP with

Firm H –ve
Cost of Production
FG holding Avg Finished Goods x 12 FG kept with firm H –ve. FG
includes unsold FGs. Tells rejections, defective n
Cost of Sales unsold FGs

Inventory Turn Inventory x 365 Inventory held for days. Material

mgmt
over ratio
Cost of Goods sold
 Profitability Ratios
Return on Investment EBIT The higher the better
(EBIT/Sales) x (Sales/ NOA)
Net Operating Assets
(All assets – Intangible – outside investments)

Return on Equity PAT The higher the better

TNW
Gross Profit Ratio Gross Profit x 100 The higher the better
Sales
Net Profit Ratio PAT x 100
Sales
Operating Profit Operating Profit (EBITor EBIDT) x 100
Sales
Return on Capital PAT
Employed
Capital Employed
(Total liabilities – Funds invested outside business)
 Other Ratios
CA or WC T/O NET SALES Effective usage of CA
Ratio AVG Working Capital

Interest Coverage EBIT Capacity to serve the

Ratio interest payments
Interest
Return on Asset PAT x 100 Tells the efficient usage of
Assets
Total Assets – Intangible
DSCR PAT + Depreciation + Int on TL Tells amount available for
payment obligations
Int on TL + Instalment on TL
Asset Turnover Ratio Sales
Net Operating Assets
(All assets- Intangible – Outside investments)
 Profitability Ratios
• Profits also to be scrutinized:

• Booking the sales effected in the subsequent year in the accounting period itself (which would be
revealed by unusually heavy sales, particularly in the last couple of months of the accounting period),
• Inflating sales by sending goods on - consignment basis (which are not really sales),
• Inflated valuation of closing stock,
• Not providing adequate depreciation especially on the increased amount of fixed assets on revaluation
of assets,
• Capitalisation of interest during the period of deferred credit etc.

Shall inflates the profit, which if siphoned off by way of dividend etc., would lead to liquidity problems.
Unusually substantial sales returns immediately after the accounting period would also indicate possibility
of inflated sales.
Branches should guard themselves against such practices to ensure that cash surplus generated is real
and that adequate portion thereof is retained in the business to strengthen the capital base.
 Current Ratio
• For MSME (Regulatory & expanded definition) accounts, while
calculating current ratio, TL installments falling due in next 12 months
should be excluded, provided the projected cash flows generation is
more than the projected installments of Term loans.
• Further, FDR kept as margin for BG/LC maturing within next 12
months should be treated as current assets.
• For Export oriented MSME Units (having more than 50% turnover
from export activities), the indicative benchmark current ratio is 1.10
• The subordinated debt however should not exceed borrower’s tier I
capital i.e. capital plus free reserves less intangible assets

14
 DSCR
Debt Service Coverage Ratio (DSCR) :
 Once the estimation of cost of production and profitability is made, it will usually reveal
that the operations during the initial years may show a low profitability or even losses due
to high initial cost or low capacity utilisation etc.,
 The viability of the project or safety of the term loan is determined by the ability of the unit
to generate sufficient surplus income to meet the instalments of term loans and servicing of
interest thereon.
 The DSCR should be more than 1.25 and the acceptable average DSCR is 1.75 subject to
that it should not be less than 1.25 in any year.

DSCR = Net Profit After Tax + Depreciation + Interest on Term Loan

Instalments on Term Loan + Interest on Term Loan
 DSCR
Particulars Year1 Year2 Year3 Year4 Year5 TOTAL

1). NPAT  10.00 12.50 15.00 17.50 20.00  

2). DEPRECIATION 10.00 10.00 10.00 10.00 10.00  
3). TL INTEREST 6.42 4.98 3.54 2.10 0.66  
4). TOTAL: Cash Accrual 26.42 27.48 28.54 29.60 30.66 142.70
             
5). TL INTEREST 6.42 4.98 3.54 2.10 0.66  
6). TL INSTALMENTS 12.00 12.00 12.00 12.00 12.00  
7). TOTAL: Cash Payments 18.42 16.98 15.54 14.10 12.66 77.70
             
DSCR (4/7) 1.43 1.62 1.84 2.10 2.42  
             
Average DSCR (Total of 4 / Total of 7) 1.84
 Analysis for TL

 Sensitivity Analysis – If the values of DSCR altered dramatically to a +5% or -5% change
in the value of any of the variable so as to make it unviable, we may state that the project
is sensitive to variations in that parameter.

 Net Present Value – When the cash outflows and cash inflows over the entire project
period is discounted at a predetermined rate the net present value is derived as a surplus of
discounted inflows over discounted outflows.

 Internal Rate of Return – IRR of a project is defined as that discount rate at which the
present worth or present value of cash outflows of a project over the project life equals the
cash inflows.

 Break Even Point Analysis – The level of production / sales at which the unit is able to
make sufficient profit to meet its fixed cost is called the break even level.
 Key Business Drivers

S. No Key Business Drivers Increase/ Decrease

1 A/c Receivables Days Increase

2 A/c Payables Days Decrease

3 WIP Days Increase

4 % of change in Price Increase

5 Overhead Expenses% Increase

6 Cost of Goods Sold Increase

7 Revenue growth% Decrease

 SENSITIVITY ANALYSIS
SENSITIVITY ANALYSIS :
Case-1 : Sales Decrease by = 10%
Case-2 : RM Increase by = 10%
Case-3 : Dir.Labour Increase by = 10%
 

Cash Accruals: Year1 Year2 Year3 Year4 Year5

Base Case 26.42 27.48 28.54 29.60 30.66
Case-1 : 16.42 14.98 13.54 12.10 10.66
Case-2 : 22.42 22.48 22.54 22.60 22.66
Case-3 : 24.42 24.98 25.54 26.10 26.66
 

DSCR: Year1 Year2 Year3 Year4 Year5

Base Case 1.43 1.62 1.84 2.10 2.42
Case-1 : 0.89 0.88 0.87 0.86 0.84
Case-2 : 1.22 1.32 1.45 1.60 1.79
Case-3 : 1.33 1.47 1.64 1.85 2.11

Average DSCR:  
Base Case 1.84
Case-1 : 0.87
Case-2 : 1.45
Case-3 : 2.99