Financial ratios matter greatly to lenders and investors because they provide a clear, comparable and quantifiable snapshot of a business’s financial health and risk profile.

These ratios distil complex financial statements into simple indicators that reveal how effectively a company manages liquidity, debt, profitability and operational efficiency.

For lenders, ratios such as the current ratio and debt service coverage ratio help determine whether a business can meet its short term obligations and comfortably repay its debts.

Investors use profitability and efficiency ratios to assess how well a company converts resources into profits and how its financial performance compares to industry peers.

By benchmarking against historical data or market standards, these ratios identify strengths, weaknesses and trends, helping lenders and investors make informed, data driven lending and investment decisions.

Ultimately, understanding and managing key financial ratios boosts a business’s credibility and increases the likelihood of obtaining favourable financing terms.

UNDERSTANDING THE KEY FINANCIAL RATIOS LENDERS AND INVESTORS LOOK FOR
When seeking finance, lenders and investors closely examine key financial ratios to assess your business’s health, stability and growth potential.

These ratios offer a snapshot of liquidity, solvency, profitability and operational efficiency that shape their confidence in your ability to repay debts or generate returns.

LIQUIDITY RATIOS
Can you pay your bills on time?
Liquidity ratios measure your business’s ability to cover short term debts with readily available assets.

Two important ones are:

• Current ratio
  Calculated as current assets divided by current liabilities. A ratio above 2:1 is often seen as healthy, indicating you have twice the liquid assets needed to settle immediate debts. However, industry norms and asset composition matter.
• Quick ratio (acid test)
  Current assets minus inventory divided by current liabilities. This excludes stock since it may take longer to turn into cash. It tests how easily you can cover liabilities without relying on sales of inventory.

High liquidity ratios mean you’re well positioned to withstand cash flow pressures, that lenders highly value.

SOLVENCY RATIOS
How reliant are you on debt?
Solvency ratios assess your longer term ability to meet financial obligations and how much debt funds your assets.

• Debt to equity ratio
  Total liabilities divided by shareholder equity. In Australia, a ratio around 1 to 1.5 is considered reasonable. Above this, lenders may see higher financial risk. Below it, potential underutilisation of leverage.
• Debt to assets ratio
  Total liabilities divided by total assets. Ratios less than 1 indicate assets cover all debts, reassuring creditors.

High solvency ratios can restrict your ability to gain further finance, so managing debt prudently is crucial.

PROFITABILITY RATIOS
Are you making money?
These ratios show how efficiently your business generates profit relative to sales or assets.

• Gross margin
  Gross profit divided by sales. It signals the percentage of revenue left after direct costs to cover overheads.
• Net margin
  Net profit divided by sales. This reflects the overall profitability after all expenses except taxes.

Comparing margins to industry benchmarks reveals your competitive position and earning power.

EFFICIENCY RATIOS
How well do you manage resources?
Efficiency metrics such as inventory turnover and accounts receivable days indicate how well you convert assets into cash flow.

Faster turnover and lower receivable days improve liquidity and demonstrate operational strength.

DEBT SERVICE COVERAGE
Can you service your debt?
Lenders closely check your ability to cover debt repayments.

• Interest coverage ratio
  EBIT divided by interest expenses.
• Debt service coverage ratio
  Cash available for debt service over debt payments.

Ratios above 1.5 to 2.0 indicate a comfortable buffer to meet loan obligations.

Understanding and improving these financial ratios will strengthen your business’s appeal to lenders and investors, increasing your chances of securing successful finance with favourable terms.

Regular monitoring and benchmarking also provides ongoing business insights critical for sustainable growth and risk management.

Good luck with preparing for your application. We hope this guide helps.