Lenders — banks, NBFCs, working-capital providers, factoring platforms — review monthly MIS packs in a hurry. The credit officer has 15 minutes to form a view across multiple borrowers. They don’t read narrative or look for nuance. They look at four ratios that, together, give a picture of liquidity, ability to service debt, leverage and earnings quality. Knowing those four, and presenting them prominently in the MIS pack, materially improves the lender’s read on your business. Below is the working framework, ratio by ratio.
Ratio 1 — Current Ratio (liquidity)
Current Ratio = Current Assets / Current Liabilities.
This is the lender’s first check on liquidity. Current assets include cash, debtors (typically excluding doubtful), inventory (net of slow-moving provisions), short-term loans and advances, prepaid expenses. Current liabilities include creditors, statutory dues, short-term borrowings, current portion of long-term debt.
The accepted norm for working-capital-financed businesses is at least 1.33. The banker’s view: a current ratio below 1.0 means you cannot meet current liabilities from current assets — you’re borrowing short to fund long, which is a red flag. Between 1.0 and 1.33, the lender wants explanation. Above 1.33 is comfortable; above 2.0 may suggest under-utilised working capital.
What it hides: a high current ratio can mask receivables ageing problems (large debtors that are actually doubtful) or inventory build-up (large inventory that’s slow-moving). Lenders cross-check with the ageing tables.
Ratio 2 — DSCR (Debt Service Coverage Ratio)
DSCR = (Net Profit after Tax + Interest + Depreciation + Other non-cash charges) / (Interest + Principal due in the period).
This is the ratio that bankers look at hardest. It measures whether your operating cash flow is enough to service your debt obligations. For term loans, the banker tracks DSCR on the EMI schedule. For working-capital limits, it’s tracked annually on the year’s interest plus principal repayment.
The accepted norm is at least 1.5 for healthy businesses, with some sectors (real estate, infra) tolerating lower. Below 1.0 means current cash flow cannot service current debt — the loan goes into stressed-asset watch. Between 1.0 and 1.5 is acceptable but not comfortable. Above 1.5 is healthy.
For an MIS pack to a lender, computing DSCR monthly on the rolling 12-month basis (taking the trailing 12 months of profit + non-cash charges, against the next 12 months of debt service) is more meaningful than the annual computation. Most professional MIS packs we build for lender-reporting show monthly rolling-12 DSCR.
Ratio 3 — Debt-Equity (leverage)
Debt-Equity = Total Debt / Total Equity.
Total Debt includes term loans, working-capital borrowings, debentures, and (depending on the lender’s view) loans from related parties. Total Equity is shareholders’ funds — share capital plus reserves and surplus.
The norm varies sharply by sector. Manufacturing tolerates 2:1; services should be below 1:1; trading and pure-asset businesses can go to 3:1. Bankers compare against the sector benchmark they have internally.
The trend matters more than the absolute number. A business with consistent 2:1 leverage is in a steady-state. A business whose D/E was 1:1 last year and is now 1.8:1 is leveraging up — the lender wants to know what’s funding the increase. New project capex? Working capital build? Loss-funding?
Ratio 4 — Operating Cash Flow / EBITDA (earnings quality)
Operating Cash Flow Conversion = Operating Cash Flow from CFS / EBITDA.
This is the least-known of the four but the most quietly important. It tells the lender whether your reported profits are converting to cash. The numerator is operating cash flow from the cash-flow statement (after working-capital movements). The denominator is EBITDA from the P&L.
A conversion ratio above 0.7 is healthy — means 70 paise of every rupee of EBITDA arrives as operating cash. A ratio below 0.5 means cash is leaking somewhere — usually in receivables build-up or inventory build-up, occasionally in adverse working capital due to advance to suppliers. A conversion ratio that’s declining over months is the strongest leading indicator of a coming credit issue.
Many MIS packs we see don’t show this ratio at all. The CFS is shown, the P&L is shown, but the conversion ratio (which compresses the two into one number) isn’t computed. Lenders increasingly compute it themselves — making it visible upfront removes the friction.
How the four read together
A healthy business looks like:
- Current Ratio > 1.33 — comfortable liquidity
- DSCR > 1.5 — comfortable debt service coverage
- Debt-Equity within sector norm — appropriate leverage
- Operating Cash Flow / EBITDA > 0.7 — earnings convert to cash
A stressed business looks like:
- Current Ratio < 1.0 — cannot meet current liabilities from current assets
- DSCR < 1.0 — cannot service debt from current cash flow
- Debt-Equity above sector norm and rising — over-leveraged
- Operating Cash Flow / EBITDA < 0.5 — earnings not converting to cash
A growing business in capex mode looks healthy on three of four but with DSCR temporarily pressured (because new debt is being serviced before the corresponding revenue ramp). The lender wants to see the project DSCR forecast tied to the capex timeline.
The traps that show up in MIS packs
Stale receivables inflating current assets
Debtors over 180 days are typically of doubtful collectibility. Including them at full value inflates the current ratio. The cleaner presentation is debtors net of doubtful, with a separate disclosure of gross-vs-doubtful.
Inventory build-up that’s slow-moving
Inventory at cost looks like a liquid asset on the balance sheet. The lender will ask about ageing. Inventory above 120 days for non-seasonal businesses is a yellow flag.
Related-party loans treated as equity
Promoter loans sometimes get presented in “quasi-equity” categories. Lenders typically reclassify these as debt in their internal computation. Better to disclose them as debt with a note on subordination / non-callable terms.
EBITDA inflated by other income
Some MIS packs include interest income, gain on sale of investments, write-back of provisions in EBITDA. The clean definition is operating EBITDA — from core business. Lenders adjust to operating EBITDA themselves; making it transparent on the face of the P&L saves the friction.
Quarterly numbers in a monthly pack
Some businesses report on a quarterly close and present monthly with simple straight-lining. The result is fake-monthly data that doesn’t move with reality. A genuine monthly close gives the lender a real signal.
What to put on Page 1 of your MIS pack
The lender-facing MIS pack should have these on Page 1:
- Headline financial summary — revenue, EBITDA, net profit, operating cash flow (this month and YTD vs budget / prior period)
- The four ratios above, with the prior month’s value and the trend arrow
- Bank position — cash balance, drawing power, utilisation of working-capital limit, any limit-exceedances
- One-line commentary on what’s moved
Page 2 onwards: the underlying P&L, balance sheet, cash flow, ageing, KPI dashboard. The credit officer who has 15 minutes will read Page 1. Make Page 1 do the work.
Sources
- RBI — Master Direction on Income Recognition, Asset Classification and Provisioning (IRAC norms)
- ICAI — Guidance Notes on Cash Flow Statement (Ind AS 7 / AS 3)
- RBI — Master Circular on Loans and Advances and Working Capital Assessment
- MCA — Schedule III of Companies Act 2013 (presentation of financials)
Talk to a partner.
A 30-minute call with a partner — no deck, no follow-up email blasts. Just a read on how this applies to your facts.