Key Financial Ratios for Trade Credit Analysis

“If you can’t measure it, you can’t improve it.” - Peter Drucker

Today the market trends change daily and are very unpredictable. In this scenario, not having a clear idea of what ratios to track could lead to inaccurate credit decisions. Result? End up doing business with at-risk customers.

Despite the economic flux, how can you accurately assess your customer’s creditworthiness?

Regular tracking and monitoring of customers' performance metrics, could help credit analysts keep a close eye on their customer’s financial health.

Here are some key metrics to identify risks associated with potential customers

-Liquidity ratios - This ratio will help you determine debtor's ability to pay off their current debt obligations without raising external capital.

-Leverage ratios - This ratio will help you assess your customers’ ability to meet their economic obligations.

-Activity ratios - This ratio will help you understand how efficiently the debtor is leveraging the assets on its balance sheet, to generate revenues and cash.

-Net Income ratios - This ratio will help you measure your organization’s profitability and is primarily used for internal comparison.

Tracking these key metrics could simplify complex sets of data and even save a lot of time and effort. It even widens the scope of inter-firm comparisons to identify companies that are likely to go out of business.

Watch the complete course to explore the methods to use these key ratios in detail.