Aalekh
All calculators
For Chartered AccountantsRates reviewed September 2026

Financial Ratio Calculator for a Bank Loan Proposal

A credit officer does not read a balance sheet line by line. Eight ratios do most of the work: two on liquidity, two on leverage, two on debt service, and two on how long money sits in stock and in receivables. Each one is arithmetic, so there is no arguing with the output, but each also has more than one accepted definition, which is where proposals get compared against the wrong benchmark.

None of these ratios is defined by statute for lending purposes. What does exist is Schedule III to the Companies Act 2013, which since the amendment effective 1 April 2021 requires eleven ratios to be disclosed in the notes to accounts, with the company explaining what it put in the numerator and the denominator. The ICAI Guidance Note on Division I of Schedule III sets out the formulae that most preparers now follow, and this page uses definitions consistent with them so that the ratios in your notes and the ratios in your CMA pack do not contradict each other.

Debt service coverage is the one worth being explicit about. This page computes DSCR as EBITDA divided by interest plus term loan instalments falling due in the year, which is the cash-based convention banks use when sizing a term loan. The Schedule III and ICAI formulation is close but not identical: it takes earnings available for debt service as profit after tax plus non-cash operating expenses plus interest, over interest and lease payments plus principal repayments. Both are in use, so name yours when you present a proposal.

Financial Ratio Calculator

₹

Including the working capital limit and the instalments falling due within the year.

₹

Removed from current assets to give the quick ratio.

₹

Term loans and other borrowings that are not current.

₹

Everything owed to anyone other than the shareholders.

₹

Net worth after taking out goodwill, brands and other intangibles.

₹
₹
₹
₹
₹
₹
₹

Current ratio

1.33

1 of 8 ratios is outside the usual comfort level

Current ratioat or above the 1.33 banks are used to
1.33
Quick ratiobelow 1.00, which a bank would question
0.83
Debt-equity ratiowithin the 2.00 most banks work to
0.60
TOL / TNWwithin the 3.00 most banks work to
1.80
DSCREBITDA over interest plus instalments, at or above the 1.50 average banks look for
1.50
Interest coverageabove 2.00, so interest is comfortably covered
3.00
Inventory holding dayswithin 90 days, so stock is turning
55 days
Debtor dayswithin 90 days, so collections are holding
44 days
Net working capitalcurrent assets less current liabilities
₹1,00,00,000
  • 1 of the eight ratios sits outside the usual comfort level. Address each one in the proposal rather than leaving the credit officer to raise it.
  • These comfort levels are market convention. Schedule III requires eleven ratios in the notes to accounts but does not fix the formulae, so state the definition you have used alongside every figure.

The formula

Current ratio = CA ÷ CL; Quick ratio = (CA - Inventory) ÷ CL; Debt-equity = Long-term debt ÷ TNW; TOL/TNW = Total outside liabilities ÷ TNW; DSCR = EBITDA ÷ (Interest + Instalments); Interest coverage = EBITDA ÷ Interest; Inventory days = Closing stock ÷ Sales × 365; Debtor days = Debtors ÷ Sales × 365

Tangible net worth (TNW)
Paid-up capital plus reserves, less accumulated losses, intangible assets and any amount not written off, which is the net worth a bank will lend against.
Total outside liabilities (TOL)
Everything owed to anyone other than the shareholders, being total liabilities less tangible net worth, so it picks up both the working capital limit and the term debt.
EBITDA
Earnings before interest, tax, depreciation and amortisation, used here as the cash available before debt service.
Debt service
Interest for the year plus the term loan instalments falling due in that year, which is what the DSCR denominator has to cover.
Inventory and debtor days
How many days of annual sales are locked up in closing stock and in receivables at the balance sheet date, computed on a 365 day year.

These are definitional rather than statutory. Schedule III requires the disclosure of eleven ratios in the notes to accounts but leaves the composition to the preparer, so a proposal should state the formula it has used alongside the number.

How to calculate it

  1. 1

    Classify the balance sheet before computing anything

    Split assets and liabilities into current and non-current on the twelve month test, and take intangibles, deferred revenue expenditure and accumulated losses out of net worth. A ratio computed off an unclassified balance sheet is not wrong so much as unusable, because the bank will reclassify and get a different answer.

  2. 2

    Start with liquidity

    Current ratio is current assets over current liabilities, and quick ratio removes inventory from the numerator because stock cannot be turned into cash on demand. A current ratio at or above 1.33 is the level banks grew used to under the Tandon norms, and a quick ratio below 1.00 says the business depends on selling stock to meet its near-term dues.

  3. 3

    Then leverage

    Debt-equity compares long-term borrowing with tangible net worth and speaks to the term loan. TOL/TNW compares everything owed to outsiders with the same net worth and speaks to the whole balance sheet, so it is the one a working capital sanction turns on. Banks commonly look for debt-equity within 2 and TOL/TNW within 3, with manufacturing units sometimes allowed more.

  4. 4

    Test whether the debt can be serviced

    DSCR asks whether the year's cash covers interest and the instalments that fall due. Under 1.00 the loan cannot be serviced out of operations at all. Banks typically want an average above 1.50 across the tenor with no single year below about 1.25, and they will run the calculation again on a downside case before they believe it.

  5. 5

    Read the working capital cycle

    Inventory days and debtor days convert the balance sheet back into time. Both are compared with the sector and with the company's own history, not with an absolute threshold, but a jump of thirty days in receivables with flat sales is the single most common trigger for a question about revenue quality at the sanction stage.

  6. 6

    Present the ratios with their definitions

    Put the formula next to every number in the proposal, particularly for DSCR and TOL/TNW where more than one convention is in circulation. It costs a line each and it stops the credit officer recomputing your ratios on a different basis and arriving somewhere worse.

What each ratio is read against

What each ratio is read against
RatioFormula used hereLevel a bank typically questions
Current ratioCurrent assets ÷ current liabilitiesBelow 1.33
Quick ratio(Current assets - inventory) ÷ current liabilitiesBelow 1.00
Debt-equityLong-term debt ÷ tangible net worthAbove 2.00
TOL/TNWTotal outside liabilities ÷ tangible net worthAbove 3.00
DSCREBITDA ÷ (interest + term loan instalments)Below 1.50 on average, or below 1.25 in any year
Interest coverageEBITDA ÷ interestBelow 2.00
Inventory daysClosing stock ÷ sales × 365Above 90, or well above the sector
Debtor daysDebtors ÷ sales × 365Above 90, or rising while sales are flat

Worked example

Current assets and current liabilities
₹4,00,00,000 and ₹3,00,00,000
Inventory and closing stock
₹1,50,00,000
Long-term debt and tangible net worth
₹1,50,00,000 and ₹2,50,00,000
Total outside liabilities
₹4,50,00,000
EBITDA, interest and instalments
₹90,00,000, ₹30,00,000 and ₹30,00,000
Sales and debtors
₹10,00,00,000 and ₹1,20,00,000
  • Current ratio = ₹4,00,00,000 ÷ ₹3,00,00,000 = 1.33
  • Quick ratio = (₹4,00,00,000 - ₹1,50,00,000) ÷ ₹3,00,00,000 = 0.83
  • Debt-equity = ₹1,50,00,000 ÷ ₹2,50,00,000 = 0.60 and TOL/TNW = ₹4,50,00,000 ÷ ₹2,50,00,000 = 1.80
  • DSCR = ₹90,00,000 ÷ (₹30,00,000 + ₹30,00,000) = 1.50
  • Interest coverage = ₹90,00,000 ÷ ₹30,00,000 = 3.00
  • Inventory days = ₹1,50,00,000 ÷ ₹10,00,00,000 × 365 = 55 and debtor days = ₹1,20,00,000 ÷ ₹10,00,00,000 × 365 = 44

Current ratio 1.33, DSCR 1.50 and TOL/TNW 1.80, with the quick ratio at 0.83 the one figure a bank would question

Frequently asked questions

For a working capital limit the order is usually current ratio, TOL/TNW and then the working capital cycle in days, because those three describe whether the business can meet its near-term dues and how much of the balance sheet already belongs to outsiders. For a term loan the order changes: DSCR and debt-equity come first, since the question is whether the instalments can be paid out of operating cash over the tenor.
This page uses EBITDA divided by interest plus the term loan instalments falling due in the year, which is the cash-based convention used in loan appraisal. The Schedule III and ICAI Guidance Note formulation instead takes earnings available for debt service, being profit after tax plus non-cash operating expenses plus interest, over interest and lease payments plus principal repayments. Both are legitimate and they give different numbers, so always state which one a proposal uses.
Debt-equity compares only long-term borrowing with tangible net worth, so it measures how leveraged the permanent capital structure is. TOL/TNW compares everything owed to outsiders, including creditors, statutory dues and the working capital limit, with the same net worth. A company can look comfortable on debt-equity and stretched on TOL/TNW if it runs heavily on supplier credit, which is exactly the case a working capital banker is trying to find.
Tangible net worth is paid-up capital plus reserves, less accumulated losses, deferred and miscellaneous expenditure not written off, and intangible assets such as goodwill, brands and capitalised software. Banks strip intangibles out because they cannot be realised in a distress sale, so the cushion behind the loan is smaller than the balance sheet net worth suggests. A company with goodwill from an acquisition can have a healthy net worth and a much thinner tangible net worth.
Not as a rule. The 1.33 benchmark comes from the Tandon Working Group norms, and the Reserve Bank withdrew that prescription, leaving banks free to decide their own minimum current ratio. Most have kept 1.33 as an internal comfort level because Method II of the MPBF computation produces exactly that ratio by construction, so a proposal below it still invites a question even though nothing requires the number.
Schedule III to the Companies Act 2013, as amended with effect from 1 April 2021, requires companies to disclose eleven ratios in the notes to accounts, including current ratio, debt-equity, debt service coverage, inventory turnover and trade receivables turnover, together with an explanation of any change of more than 25 percent against the previous year. The Schedule does not fix the formulae, so the company states what it included in the numerator and the denominator, and most follow the ICAI Guidance Note.
A quick ratio under 1.00 means near-term dues exceed the assets that can be realised without selling stock, which is common in manufacturing and in seasonal trades and is not fatal on its own. Explain it with the inventory holding period and the order book, show that the stock is moving rather than ageing, and pair it with a current ratio that holds up. A quick ratio that is falling year on year while inventory days rise is a different matter and needs addressing before the proposal goes in.

Sources

Rates and rules on this page come from the following. This is a working aid, not professional advice: confirm anything material with your Chartered Accountant before you act on it.

Stop re-keying these figures

Aalekh runs this calculation on your actual client data, pulls the underlying ledgers straight from Tally, and carries the result through to the financial statements and the return.

Get StartedBook a demo

Related calculators