How a Credit Rating Is Decided: The 8 Financial Ratios

If you have ever wondered how a credit rating is decided in India, the short answer is this: a SEBI-registered agency forms a forward-looking opinion on your ability to repay debt on time, built on roughly equal parts business risk, financial risk and management risk. The financial-risk half is the most concrete — and it comes down to about eight ratios that a CRISIL or ICRA analyst calculates from your audited numbers before they ever meet you.

Those eight ratios do not, by themselves, decide your grade. But they set the floor and the ceiling. A clean narrative can lift you a notch; weak ratios you cannot explain will pull you down one. Knowing exactly what the analyst is computing — and where your numbers sit against the benchmark — is the difference between walking into the rating meeting prepared and being caught off guard.

What a rating actually measures

A credit rating is a SEBI-regulated independent opinion on whether an issuer can service its debt obligations in full and on time. Agencies group their assessment into three buckets:

• Business risk — market position, sector outlook, scale, customer and supplier concentration.
• Financial risk — leverage, coverage, liquidity, cash generation. This is where the eight ratios live.
• Management risk — track record, governance, group support, disclosure quality.

Financial risk is where the analysis is most measurable, which is why the ratios get so much attention. Under RBI norms, an external rating is mandatory for bank exposures of ₹50 crore and above, and the outcome typically moves your loan pricing by 50–150 basis points — so each notch is worth real money over a facility’s life.

The 8 financial ratios that move your grade

Here are the eight ratios agencies anchor to, what each one signals, and indicative comfort zones for a mid-corporate. Treat the benchmarks as directional — actual thresholds vary by sector, and a capital-intensive manufacturer is read differently from an asset-light services firm.

1. Gearing — the leverage anchor

Gearing (total debt divided by tangible net worth) is the first number most analysts look at. It tells them how much of the business is funded by lenders versus the promoter’s own skin in the game. A spike in gearing — say from a debt-funded capex — is not fatal, but it must be explained and tied to a payback plan.

2. Total Debt / EBITDA — the repayment-runway test

This expresses your debt as a multiple of annual earnings. Below 3x is comfortable for most sectors; cross 4.5x and the analyst starts questioning whether earnings can ever retire the debt without refinancing.

3 & 4. Interest coverage and DSCR — can you actually service it?

Interest coverage (EBITDA over interest) checks whether operations comfortably cover the interest bill. DSCR goes further, testing cash flow against both interest and principal repayments. DSCR is the single number most lenders anchor to — a ratio below 1.2x signals the business is running close to the edge.

5. Current ratio — the liquidity check

A current ratio above 1.33x has been the banking benchmark in India for decades. It confirms you can meet short-term obligations without scrambling. A ratio well below 1 usually points to a stretched working-capital cycle — the most common red flag for an SME borrower.

6, 7 & 8. NCATD, RoCE and the capital base

Net cash accruals to total debt (NCATD) measures how much internally generated cash you throw off relative to what you owe — a proxy for self-liquidating capacity. RoCE shows whether the capital deployed actually earns more than it costs. And the absolute net-worth figure and your margin trend round out the picture: a thin or eroding net worth limits how high you can be rated regardless of the other ratios.

Why the ratios are only half the story

Two companies with identical ratios can land a notch apart. The reason is that agencies overlay business and management risk on the financial numbers. A firm in a structurally declining sector, or with 60% of revenue from one customer, will be marked down even with strong coverage. Conversely, demonstrable promoter support, a visible order book and clean governance can defend a rating the raw ratios alone would not justify.

This is also why the management meeting matters. It is your chance to explain the why behind a weak ratio — a one-off margin dip, a deliberate inventory build ahead of a large order, a promoter infusion that de-risked the balance sheet. For a deeper view on this, see our guide on how to prepare your company for a CRISIL credit rating.

How to read your own numbers before the analyst does

Before you approach any agency, run these eight ratios on your last three years of audited financials and look for the trend, not just the latest figure. Where a ratio sits outside its comfort zone, prepare a one-line explanation and, ideally, a mitigant. The companies that defend a strong rating are the ones that walk through their own file the way the credit committee will. If your gearing is high but falling, say so; if DSCR dipped on a one-off, show the path back.

This pre-emptive work is exactly where advisory earns its keep. At Finnova Advisory — CA-led and running rating mandates across all seven SEBI-registered agencies since 2011 — every engagement starts by reading your balance sheet the way an analyst will, then shaping both the numbers and the narrative. If a rating is on your horizon, our credit rating advisory team prepares the rating pack and represents management so the outcome reflects your fundamentals. If you are also asking which agency to use, our comparison of CRISIL vs ICRA vs CARE vs Acuité walks through the choice.

Key takeaways

• A credit rating weighs business, financial and management risk — the financial half rests on about eight ratios.
• The core ratios are gearing, total debt/EBITDA, interest coverage, DSCR, current ratio, NCATD, RoCE and net worth/profitability.
• DSCR and gearing carry the most weight with lenders; a current ratio above 1.33x and debt/EBITDA below 3x are classic comfort markers.
• Ratios set the floor and ceiling, but business and management risk and your narrative decide where you land within that range.
• Run the eight ratios on three years of data and prepare an explanation for every number outside its comfort zone before the rating meeting.

FAQ

What are the main financial ratios used in credit rating in India? The eight most-watched are gearing (debt to net worth), total debt to EBITDA, interest coverage, DSCR, current ratio, net cash accruals to total debt (NCATD), RoCE, and net worth with profitability margins. Together they capture leverage, coverage, liquidity and cash generation.

Which single ratio matters most for a credit rating? There is no universal answer, but DSCR (debt-service coverage) and gearing carry the most weight, because they directly test whether the business can service debt and how much promoter capital underpins it. Lenders typically want DSCR above 1.2–1.5x.

Do financial ratios alone decide my credit rating? No. Ratios set the broad range, but agencies also assess business risk (market position, sector, concentration) and management risk (governance, track record, group support). A strong narrative can lift you a notch; an unexplained weakness can cost you one.

What is a good gearing ratio for a credit rating? For most mid-corporates, gearing below 1.5x is comfortable and above 2.5x is considered stretched. The acceptable level varies by sector — capital-intensive businesses are read more leniently than asset-light ones.

How long does a fresh credit rating take? Typically four to eight weeks from mandate to rating letter, depending on the agency’s workload, how ready your financials are, and the depth of management discussion required. Most of that time is preparation, which is where good advisory makes the difference.