Page 20 - Banking Finance October 2023

ARTICLE

NUMBERS SPEAK:

UNVEILING

BORROWER

VIABILITY

THROUGH RATIO

ANALYSIS

R atio analysis plays a crucial role in the Risk Assessment: Ratios allow lenders to gauge the risk
assessment of loan applications by providing
associated with granting a loan. By comparing various financial
ratios over time and against industry benchmarks, lenders can
valuable insights into the financial health and
performance of a business or individual. Lenders
and financial institutions use ratio analysis as a tool to identify potential red flags, such as deteriorating financial
performance, liquidity issues, or excessive debt levels.
evaluate the creditworthiness, repayment capacity, and risk
associated with extending a loan. Here are some key reasons Creditworthiness: Ratios provide insights into a borrower's
why ratio analysis is important for loan assessment: ability to service debt. Lenders can assess the borrower's
Financial Health Evaluation: Ratios help assess the financial ability to make regular interest payments and repay the
health of the borrower by analyzing their financial principal amount based on their operating cash flows and
statements, including income statements, balance sheets, profitability.
and cash flow statements. These ratios provide a
comprehensive view of the borrower's financial position, Liquidity Analysis: Liquidity ratios, such as the current ratio
indicating whether they have the capacity to generate and quick ratio, indicate a borrower's ability to cover short-
sufficient funds to meet their obligations. term obligations. Lenders use these ratios to determine
whether the borrower has enough liquid assets to manage
their day-to-day expenses and repayments.

Profitability Assessment: Profitability ratios help lenders
understand the borrower's ability to generate profits from
their operations. This information is crucial in assessing
whether the borrower can generate enough income to cover
loan repayments and other financial commitments.

20 | 2023 | OCTOBER | BANKING FINANCE